-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HzXazZLPbWq8wMQc52hFFREkV6X2GatATarZtcNgIMIGYt/6BKR6EuJM9HKymken SdJmnC5eYu8bq5gMYiyOsQ== 0000316709-97-000021.txt : 19970730 0000316709-97-000021.hdr.sgml : 19970730 ACCESSION NUMBER: 0000316709-97-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970729 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHWAB CHARLES CORP CENTRAL INDEX KEY: 0000316709 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 943025021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09700 FILM NUMBER: 97647102 BUSINESS ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156277000 MAIL ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 10-Q 1 SECOND QUARTER 1997 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 Commission file number 1-9700 THE CHARLES SCHWAB CORPORATION (Exact name of Registrant as specified in its charter) Delaware 94-3025021 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 101 Montgomery Street, San Francisco, CA 94104 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (415) 627-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No -- -- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 176,422,461* shares of $.01 par value Common Stock Outstanding on July 18, 1997 * Excludes the effects of the three-for-two common stock split declared July 16, 1997, payable September 15, 1997. THE CHARLES SCHWAB CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended June 30, 1997 Index Page ---- Part I - Financial Information Item 1. Condensed Consolidated Financial Statements: Statement of Income 1 Balance Sheet 2 Statement of Cash Flows 3 Notes 4-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-16 Part II - Other Information Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 18 Signature 19 FORWARD-LOOKING STATEMENTS In addition to historical information, this interim report contains forward-looking statements that reflect management's expectations. These statements relate to, among other things, Company contingencies, strategy, revenues, profit margin, sources of liquidity and capital expenditures. Achievement of the expressed expectations is subject to certain risks and uncertainties that could cause actual results to differ materially from those expectations. See "Description of Business" in Management's Discussion and Analysis of Financial Condition and Results of Operations in this interim report for a discussion of important factors that may cause such differences. THE CHARLES SCHWAB CORPORATION Part 1 - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements THE CHARLES SCHWAB CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ----- ----- ----- ----
Revenues Commissions $ 261,396 $ 261,149 $ 536,315 $ 502,062 Mutual fund service fees 101,824 75,384 196,522 144,219 Principal transactions 63,598 73,119 132,733 134,753 Interest revenue, net of interest expense(1) 82,485 62,405 159,208 121,349 Other 21,481 19,726 41,660 36,181 - ---------------------------------------------------------------------------------------------------- Total 530,784 491,783 1,066,438 938,564 - ---------------------------------------------------------------------------------------------------- Expenses Excluding Interest Compensation and benefits 224,119 200,481 444,957 396,189 Communications 45,511 44,346 91,212 87,300 Occupancy and equipment 38,490 33,117 73,904 63,093 Depreciation and amortization 29,686 23,353 57,459 48,104 Advertising and market development 25,954 17,844 61,789 40,047 Commissions, clearance and floor brokerage 22,217 21,773 44,661 41,306 Professional services 16,573 10,210 30,454 23,645 Other 22,491 21,960 45,939 40,511 - ---------------------------------------------------------------------------------------------------- Total 425,041 373,084 850,375 740,195 - ---------------------------------------------------------------------------------------------------- Income before taxes on income 105,743 118,699 216,063 198,369 Taxes on income 41,781 48,604 85,366 81,331 - ---------------------------------------------------------------------------------------------------- Net Income $ 63,962 $ 70,095 $ 130,697 $ 117,038 ==================================================================================================== Weighted-average number of common and common equivalent shares outstanding(2, 3) 181,091 179,250 180,959 179,069 ==================================================================================================== Primary/Fully Diluted Earnings Per Share(3) $ .35 $ .39 $ .72 $ .65 ==================================================================================================== Dividends Declared Per Common Share(3) $ .05 $ .04 $ .10 $ .08 ====================================================================================================
(1) Interest revenue is presented net of interest expense. Interest expense for the three months ended June 30, 1997 and 1996 was $133,126 and $101,152, respectively. Interest expense for the six months ended June 30, 1997 and 1996 was $256,256 and $200,161, respectively. (2) Amounts shown are used to calculate primary earnings per share. (3) Excludes the effects of the three-for-two common stock split declared July 16, 1997, payable September 15, 1997. See Notes to Condensed Consolidated Financial Statements. THE CHARLES SCHWAB CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (In thousands, except per share amounts) (Unaudited) June 30, December 31, 1997 1996 ---- ----
Assets Cash and cash equivalents $ 733,454 $ 633,317 Cash and investments required to be segregated under Federal or other regulations (including resale agreements of $5,125,028 in 1997 and $6,069,930 in 1996) 7,034,650 7,235,971 Receivable from brokers, dealers and clearing organizations 295,623 230,943 Receivable from customers -- net 5,911,678 5,012,815 Securities owned -- at market value 189,979 127,866 Equipment, office facilities and property -- net 332,664 315,376 Intangible assets -- net 61,943 68,922 Other assets 118,307 153,558 - -------------------------------------------------------------------------------------------------------- Total $ 14,678,298 $ 13,778,768 ======================================================================================================== Liabilities and Stockholders' Equity Drafts payable $ 209,317 $ 225,136 Payable to brokers, dealers and clearing organizations 1,053,450 877,742 Payable to customers 11,768,347 11,176,836 Accrued expenses and other 365,240 360,683 Borrowings 289,180 283,816 - -------------------------------------------------------------------------------------------------------- Total liabilities 13,685,534 12,924,213 - -------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock -- 9,940 shares authorized; $.01 par value per share; none issued Common stock -- 500,000 shares authorized; $.01 par value per share; 178,459 shares issued in 1997 and 1996* 1,785 1,785 Additional paid-in capital 227,557 200,857 Retained earnings 836,211 723,085 Treasury stock -- 2,137 shares in 1997 and 3,391 shares in 1996, at cost* (55,065) (60,277) Unearned ESOP shares (3,483) (5,517) Unamortized restricted stock compensation (15,870) (8,658) Foreign currency translation adjustment 1,629 3,280 - -------------------------------------------------------------------------------------------------------- Total stockholders' equity 992,764 854,555 - -------------------------------------------------------------------------------------------------------- Total $ 14,678,298 $ 13,778,768 ========================================================================================================
* Excludes the effects of the three-for-two common stock split declared July 16, 1997, payable September 15, 1997. See Notes to Condensed Consolidated Financial Statements. THE CHARLES SCHWAB CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 30, 1997 1996 ----- ----
Cash flows from operating activities Net income $ 130,697 $ 117,038 Noncash items included in net income: Depreciation and amortization 57,459 48,104 Deferred income taxes (8,553) (1,844) Stock compensation 13,300 10,774 Other 1,643 2,877 Change in securities owned--at market value (62,113) (22,090) Change in other assets 43,710 57,168 Change in accrued expenses and other 25,785 15,949 - ----------------------------------------------------------------------------------------- Net cash provided before change in customer-related balances 201,928 227,976 - ----------------------------------------------------------------------------------------- Change in customer-related balances: Payable to customers 595,674 503,871 Receivable from customers (900,557) (719,446) Drafts payable (15,871) (56,688) Payable to brokers, dealers and clearing organizations 176,030 29,387 Receivable from brokers, dealers and clearing organizations (66,250) (11,214) Cash and investments required to be segregated under Federal or other regulations 197,937 259,392 - ----------------------------------------------------------------------------------------- Net change in customer-related balances (13,037) 5,302 - ----------------------------------------------------------------------------------------- Net cash provided by operating activities 188,891 233,278 - ----------------------------------------------------------------------------------------- Cash flows from investing activities Purchase of equipment, office facilities and property--net (69,621) (78,976) Cash payments for business acquired (3,709) - ----------------------------------------------------------------------------------------- Net cash used by investing activities (69,621) (82,685) - ----------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from borrowings 10,000 54,000 Purchase of treasury stock (15,702) (1,024) Dividends paid (17,571) (13,983) Other 3,590 2,894 - ----------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (19,683) 41,887 - ----------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 550 (84) - ----------------------------------------------------------------------------------------- Increase in cash and cash equivalents 100,137 192,396 Cash and cash equivalents at beginning of period 633,317 454,996 - ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 733,454 $ 647,392 =========================================================================================
See Notes to Condensed Consolidated Financial Statements. THE CHARLES SCHWAB CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation The accompanying unaudited condensed consolidated financial statements include The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company). CSC is a holding company engaged, through its subsidiaries, in securities brokerage and related financial services. CSC's principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer with 254 branch offices in 47 states, the Commonwealth of Puerto Rico and the United Kingdom, and four regional telephone service centers. Another subsidiary, Mayer & Schweitzer, Inc. (M&S), is a market maker in Nasdaq securities that provides trade execution services to broker-dealers, including Schwab, and institutional customers. ShareLink, a subsidiary located in the United Kingdom, is a retail discount securities brokerage firm. These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, reflect all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. All adjustments were of a normal recurring nature. All material intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1996 Annual Report to Stockholders, which are incorporated by reference in the Company's 1996 Annual Report on Form 10-K, and the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997. Prior periods' financial statements have been reclassified to conform to the 1997 presentation. New Accounting Standards Statement of Financial Accounting Standards (SFAS) No. 125 -- Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was adopted by the Company effective January 1, 1997, except for certain financial assets for which the effective date has been delayed until 1998 by SFAS No. 127 -- Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The adoption of this statement did not have an effect on the Company's financial position, results of operations, earnings per share or cash flows. SFAS No. 128 -- Earnings per Share, was issued by the Financial Accounting Standards Board (FASB) in February 1997. The Company is required to adopt this statement at December 31, 1997. This statement replaces current earnings per share (EPS) reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. If this statement had been in effect during the current and prior year periods, basic EPS would have been $.37 and $.41 for the quarters ended June 30, 1997 and 1996, respectively and $.75 and $.68 for the six-month periods ended June 30, 1997 and 1996, respectively. Diluted EPS would have been the same as primary and fully diluted EPS currently reported for the periods. SFAS No. 129 -- Disclosure of Information about Capital Structure, was issued by the FASB in February 1997. The Company is required to adopt this statement at December 31, 1997. This statement establishes standards for disclosing information about the Company's capital structure. The adoption of this statement will not have an effect on the Company's financial position, results of operations, earnings per share or cash flows. SFAS No. 130 -- Reporting Comprehensive Income, and SFAS No. 131 -- Disclosures about Segments of an Enterprise and Related Information, were issued by the FASB in June 1997 and are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income, which includes net income and changes in equity except those resulting from investments by, or distributions to, stockholders. SFAS No. 131 establishes standards for disclosures related to business operating segments. The adoption of these statements will not have an effect on the Company's financial position, results of operations, earnings per share or cash flows. Commitments and Contingencies M&S has been named as one of thirty-five defendant market-making firms in a consolidated class action, In re: Nasdaq Market-Makers Antitrust Litigation, which is pending in the United States District Court for the Southern District of New York pursuant to an order of the Judicial Panel on Multidistrict Litigation. On December 16, 1994, the plaintiffs filed a consolidated amended complaint purportedly on behalf of certain persons who purchased or sold Nasdaq securities during the period May 1, 1989 through May 27, 1994. On August 22, 1995, a second consolidated amended class action complaint was filed. On November 26, 1996, a plaintiff class consisting of retail investors was certified by the Court. On April 14, 1997, a plaintiff class consisting of institutional investors was also certified. The consolidated complaint generally alleges an illegal combination and conspiracy among the defendant market makers to fix and maintain the spreads between the bid and ask prices of certain Nasdaq securities. The consolidated complaint seeks damages based upon joint and several liability, as well as injunctive and declaratory relief and attorneys fees, but does not set forth any specific amount of damages, although it requests that the actual damages be trebled where permitted by statute. Pre-trial discovery is ongoing. Between April 9, 1997 and June 6, 1997, plaintiffs reached proposed settlements with three defendants and motions to approve those settlements are pending before the Court. Although the ultimate outcome of this consolidated action cannot be determined at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with outside legal counsel, that the resolution of this action will not have a material adverse impact on the financial condition of the Company; however, there could be a material adverse impact on operating results in future periods, depending in part on the results for such periods. On July 16, 1996, the Department of Justice filed a civil action in the United States District Court for the Southern District of New York, United States of America v. Alex Brown & Sons, Inc., et al., against M&S and twenty-three other market makers in Nasdaq securities alleging violations of the federal antitrust laws in connection with certain customs and practices. On July 16, 1996, the twenty-four market-maker defendants, including M&S, entered into a Stipulation and Order resolving the civil action. Under the Stipulation, the parties agreed that the defendants would not engage in certain types of market-making activities and would take specific steps to assure compliance with the agreement. No fines or damages were assessed. On April 23, 1997, the Court approved the Stipulation and Order. Certain objecting parties have appealed the Court's approval of the Stipulation and Order to the United States Court of Appeals for the Second Circuit, which has not yet set a date for hearing the appeal. If the Stipulation and Order is finally approved, after all periods for appeal have passed, the civil action will be dismissed. Between August 12, 1993 and November 17, 1995, Schwab was named as a defendant in eleven class action lawsuits in seven states. One of the actions was voluntarily dismissed and four have been resolved favorably to Schwab on the grounds that the claims asserted are preempted by federal law. The remaining six cases are still pending in state courts in Texas, Illinois, California and Louisiana. The class actions all purport to be brought on behalf of customers of Schwab who purchased or sold securities for which Schwab received payments from the market maker, stock dealer or third party who executed the transaction. The complaints generally allege that Schwab failed to disclose and remit such payments to members of the class, and generally seek damages equal to the payments received by Schwab. The action in Texas has been stayed. The actions in Illinois and California have been dismissed on the grounds that the claims asserted are preempted by federal law. Plaintiffs have filed appeals in both cases. On June 30, 1995, the action in Civil District Court for the Parish of Orleans in Louisiana was certified on behalf of a class of Louisiana residents who purchased or sold securities through Schwab between February 1, 1985 and February 1, 1995 for which Schwab received monetary payments from the market maker or stock dealer who executed the transaction. The class certification was affirmed by the Louisiana Court of Appeals on February 29, 1996. The action is currently on appeal, by order of the Louisiana Supreme Court, from the trial Court's denial of Schwab's motion to dismiss on the grounds of federal preemption. On August 16, 1995, the action in Civil District Court for the Parish of Natchitoches in Louisiana was certified on behalf of a class of residents of all states who purchased or sold securities through Schwab since 1985 for which Schwab received monetary payments from the market maker or the third party who executed the transaction. The class certification was affirmed by the Louisiana Court of Appeals on December 2, 1996. The Natchitoches action is currently set for trial on September 22, 1997, although Schwab has filed a motion to dismiss on the grounds of federal preemption. Should the case go to trial, it potentially could result in an adverse judgment against Schwab, in a material amount, that would be subject to appeal. Although the results of legal proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with outside legal counsel, that the ultimate outcome of these actions will not have a material adverse impact on the financial condition of the Company or its results of operations. There are various other lawsuits pending against the Company which, in the opinion of management, will be resolved with no material impact on the Company's financial position or results of operations. Regulatory Requirements Schwab and M&S are subject to the Uniform Net Capital Rule under the Securities Exchange Act of 1934 (the Rule) and each compute net capital under the alternative method permitted by this Rule, which requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from customer transactions or a minimum dollar amount, which is based on the type of business conducted by the broker-dealer. The minimum dollar amount for both Schwab and M&S is $1 million. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar amount requirement. At June 30, 1997, Schwab's net capital was $624 million (10% of aggregate debit balances), which was $500 million in excess of its minimum required net capital and $315 million in excess of 5% of aggregate debit balances. At June 30, 1997, M&S' net capital was $8 million (331% of aggregate debit balances), which was $7 million in excess of its minimum required net capital. Schwab and ShareLink had portions of their cash and investments segregated for the exclusive benefit of customers at June 30, 1997, in accordance with applicable regulations. M&S had no such cash reserve requirement at June 30, 1997. Cash Flow Information Certain information affecting the cash flows of the Company follows (in thousands): Six Months Ended June 30, 1997 1996 ---- ---- Income taxes paid $ 67,961 $ 52,811 ========== ========== Interest paid: Customer cash balances $ 221,877 $ 173,213 Stock-lending activities 16,929 11,031 Borrowings 9,144 7,673 Other 4,102 3,964 ---------- ---------- Total interest paid $ 252,052 $ 195,881 ========== ========== Subsequent Event On July 16, 1997, the Board of Directors approved a three-for-two split of the Company's common stock, which will be effected in the form of a 50% stock dividend. The stock dividend is payable September 15, 1997 to stockholders of record August 14, 1997. Share and per share data have not been restated to reflect this transaction. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Description of Business The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company) provide securities brokerage and related financial services for over 4.4 million active customer accounts(a). Customer assets totaled $306.3 billion at June 30, 1997. CSC's principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer with 254 branch offices in 47 states, the Commonwealth of Puerto Rico and the United Kingdom. Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq securities, provides trade execution services to broker-dealers and institutional customers. ShareLink, a subsidiary located in the United Kingdom, is a retail discount securities brokerage firm. In May 1997, the Company was added to the Standard & Poor's 500 Index under the investment banking/brokerage industry group. The Company's strategy is to attract and retain customer assets by focusing on a number of areas within the financial services industry -- retail brokerage, mutual funds, support services for independent investment managers, equity securities market-making, electronic brokerage and 401(k) defined contribution plans. To pursue its strategy and its objective of long-term profitable growth, the Company plans to continue to leverage its competitive advantages. These advantages include advertising and marketing programs that have created a national brand, a broad range of products and services, diverse delivery systems and an ongoing investment in technology. The Company's nationwide advertising and marketing programs are designed to distinguish the Schwab brand as well as its products and services. These programs helped the Company open 290,000 new customer accounts and gather $11.1 billion in net new customer assets during the second quarter of 1997. The Company offers a broad range of products and services to meet customers' investment and financial needs at prices that management believes represent superior value. The Company's branch office network assists investors in developing asset allocation strategies and evaluating their investment choices. Branch staff also refer investors who desire additional guidance to independent fee-compensated investment managers through the Schwab AdvisorSource(trademark) service. The Company is continuing to enhance and broaden the Mutual Fund OneSource(registered trademark) service, which provides customers with the ability to invest in 750 mutual funds from 106 fund families without incurring transaction fees. During the second quarter of 1997, the Company began to offer futures and commodities trading to certain of its most active customers. The Company invests in diverse delivery systems that support the Company's customer service standards. During the second quarter of 1997, the Company opened 15 new domestic branch offices, and established new subsidiaries in the Cayman Islands and Hong Kong. In addition to its branch office network, the Company maintains four regional telephone service centers as well as electronic brokerage channels that provide customers with online and telephonic access. Online channels include PC-based services such as SchwabLink(registered trademark) -- a service for investment managers, StreetSmart(registered trademark) -- Schwab's desktop trading software, e.Schwab(trademark) -- an online investing account, and SchwabNOW!(trademark) -- which provides information and trading services through Schwab's World Wide Web site. Telephonic channels include TeleBroker(registered trademark) -- Schwab's touch-tone telephone trading service, and VoiceBroker(trademark) -- Schwab's service that uses voice recognition technology to provide individual investors with real-time quotes. - -------- (a) Accounts with balances or activity within the preceding twelve months. The Company's ongoing investment in technology is a key element in providing fast and consistent customer service, and reducing processing costs. The Company is a forerunner in placing technology in the hands of customers. During the second quarter of 1997, Schwab enhanced VoiceBroker(trademark) to provide real-time quotes on equity options. Also during the second quarter of 1997, Schwab added features to SchwabPlan(registered trademark), its comprehensive 401(k) retirement plan offering, allowing plan participants access to their accounts through the Internet. The Company faces significant competition from full commission and discount brokerage firms, as well as mutual fund companies. Increasingly, competition has come from banks, software development companies, insurance companies and others as they expand their product lines. Some of these competitors have significantly greater resources than the Company. A general trend of consolidation in financial services has attracted new competitors and strengthened existing ones. This competition may negatively impact the Company's revenue growth and profit margin. The Company's business, like that of other securities brokerage firms, is directly affected by the fluctuations in securities trading volumes and price levels that occur in fundamentally cyclical financial markets. Since transaction-based revenues continue to represent a majority of the Company's revenues, the Company may experience significant variations in revenues from period to period. The Company adjusts its expenses in anticipation of and in response to changes in financial market conditions and customer trading patterns. Certain of the Company's expenses (including variable compensation, portions of communications, and commissions, clearance and floor brokerage) vary directly with changes in financial performance or customer trading activity. Expenses relating to the level of temporary employees, contractors, overtime hours, professional services, and advertising and market development are adjustable over the short term to help the Company achieve its financial objectives. Additionally, developmental spending (e.g., branch openings, product and service rollouts, and technology enhancements) is discretionary and can be altered in response to market conditions. However, a significant portion of the Company's expenses such as salaries and wages, occupancy and equipment, and depreciation and amortization do not vary directly, at least in the short term, with fluctuations in revenues or securities trading volumes. Given the nature of the Company's revenues and expenses, and the economic and competitive factors discussed above, the Company's earnings and common stock price may be subject to significant volatility from period to period. The Company's results for any interim period are not necessarily indicative of results for a full year. In addition to historical information, this interim report contains forward-looking statements that reflect management's expectations. These statements relate to, among other things, Company contingencies (see "Commitments and Contingencies" note in the Notes to Condensed Consolidated Financial Statements, and Principal Transactions), strategy (see Description of Business), revenues (see Principal Transactions), profit margin (see Principal Transactions), sources of liquidity (see Liquidity and Capital Resources-Liquidity) and capital expenditures (see Liquidity and Capital Resources-Cash Flows and Capital Resources). Achievement of the expressed expectations is subject to certain risks and uncertainties that could cause actual results to differ materially from those expectations. Important factors that may cause such differences are noted throughout this interim report and include, but are not limited to: the effect of customer trading patterns on Company revenues and earnings; changes in technology; the effects of competitors' pricing, product and service decisions and intensified competition; evolving regulation and changing industry customs and practices adversely affecting the Company; the uncertainties of litigation; changes in revenues and profit margin due to cyclical securities markets and interest rates; and a significant downturn in the securities markets over a short period of time or a sustained decline in securities prices and trading volumes. Three Months Ended June 30, 1997 Compared To Three Months Ended June 30, 1996 Financial Overview Net income for the second quarter of 1997 totaled $64 million, down 9% from second quarter 1996 net income of $70 million. Earnings per share for the second quarter of 1997 decreased 10% to $.35 per share from $.39 per share for the second quarter of 1996. Share and per share data have not been restated to reflect the effects of the three-for-two common stock split declared July 16, 1997, payable September 15, 1997. Second quarter 1997 revenues were $531 million, up 8% from $492 million for the second quarter of 1996, as mutual fund service fees and interest revenue, net of interest expense (referred to as net interest revenue), each increased by more than 30%, primarily due to an increase in customer assets. These increases were partially offset by lower principal transaction revenues. Second quarter 1997 commission revenues were unchanged. During the second quarter of 1997, total daily average trades, which include revenue trades and Mutual Fund OneSource(registered trademark) trades, totaled 96,500, up 12% from 86,400 daily average trades for the same period last year. The Company's strategy of placing technology in the hands of customers and providing diverse delivery systems has facilitated growth in electronic trading at Schwab. A total of 36,800 daily average trades were generated through online brokerage channels during the second quarter of 1997, up 88% from 19,600 daily average trades for the same period last year. Additionally, a total of 12,700 daily average trades were generated through TeleBroker(registered trademark) during the second quarter of 1997, down 15% from 14,900 daily average trades for the same period last year, reflecting the higher proportion of trades placed through online brokerage channels. Assets in Schwab customer accounts totaled $306.3 billion at June 30, 1997, an increase of $89.6 billion, or 41%, from a year ago as shown in the table below. This $89.6 billion increase resulted from a $54.2 billion net inflow of Schwab customer assets and net market gains of $35.4 billion. - -------------------------------------------------------------------------------- Assets in Schwab Customer Accounts June 30, Percent (in billions) 1997 1996 Change - -------------------------------------------------------------------------------- Cash and equivalents: SchwabFunds(registered trademark) money market funds $ 43.8 $ 33.5 31% Schwab One(registered trademark) and other cash equivalents 11.1 8.7 28 Net securities: Mutual Fund Marketplace(registered trademark) (1): Mutual Fund OneSource(registered trademark) 49.5 33.5 48 All other 42.9 31.5 36 - -------------------------------------------------------------------------------- Total Mutual Fund Marketplace 92.4 65.0 42 Equity and other securities (1) 130.4 87.0 50 SchwabFunds equity and bond funds 5.4 2.8 93 Fixed income securities 29.3 24.3 21 Margin loans outstanding (6.1) (4.6) 33 - -------------------------------------------------------------------------------- Total assets in Schwab customer accounts $ 306.3 $ 216.7 41 ================================================================================ (1) Excludes money market funds and all of Schwab's proprietary money market, equity and bond funds. Total operating expenses excluding interest during the second quarter of 1997 were $425 million, up 14% from $373 million for the second quarter of 1996, primarily resulting from additional staff to support the Company's growth and expansion, as well as an increase in advertising and market development spending. The after-tax profit margin for the second quarter of 1997 was 12.1%, down from 14.3% for the second quarter of 1996. The annualized return on stockholders' equity for the second quarter of 1997 was 27%, down from 39% for the second quarter of 1996, reflecting the Company's higher equity base in the second quarter of 1997. Commissions Commission revenues for the Company were $261 million for both the second quarter of 1997 and of 1996. The Company earns commissions when acting as an agent and principal transaction revenues when acting as a principal or a market maker. Commissions earned on customer revenue trades, excluding commissions on trades with specialists, were $260 million for both the second quarter of 1997 and of 1996. Daily average revenue trades were 64,000 in the second quarter of 1997, compared to 57,500 for the comparable period in 1996. The Company's total revenue trades have increased as its customer base has continued to grow. However, this increase was offset by a decline in average commission per revenue trade. Average commission per revenue trade declined due to a higher proportion of trades placed through electronic brokerage channels, which provide additional commission discounts from the Company's standard rates. - ------------------------------------------------------------ Three Months Commissions Earned Ended on Customer Revenue June 30, Percent Trades 1997 1996 Change - ------------------------------------------------------------ Customer accounts that traded during the quarter (in thousands) 1,000 937 7% Average customer revenue trades per account 4.09 3.86 6 Total revenue trades (in thousands) 4,091 3,620 13 Average commission per revenue trade $63.59 $71.79 (11) Commissions earned on customer revenue trades (in millions) $ 260 $ 260 --- ============================================================ Attracting new customer accounts is important in generating commission revenues. Schwab added 290,000 new customer accounts during the second quarter of 1997, an increase of 10% from the 264,000 new accounts added during the second quarter of 1996. Mutual Fund Service Fees Mutual fund service fees increased $26 million, or 35%, to $102 million in the second quarter of 1997 from the comparable period in 1996. This increase was primarily attributable to significant increases in customer assets in funds purchased through Schwab's Mutual Fund OneSource(registered trademark) service, and in customer assets in Schwab's proprietary funds, collectively referred to as the SchwabFunds(registered trademark) (see Assets in Schwab Customer Accounts table above). Fees are earned for record keeping and shareholder services provided to funds in the Mutual Fund OneSource service, and for transfer agent services, shareholder services, administration and investment management provided to the SchwabFunds. Principal Transactions Principal transaction revenues decreased $10 million, or 13%, to $64 million in the second quarter of 1997 from the comparable period in 1996. This decrease was primarily due to lower average revenue per principal transaction (see discussion below) and lower trading volume handled by M&S. In August 1996, the Securities and Exchange Commission (SEC) adopted certain new rules and rule amendments, known as the Order Handling Rules, which significantly alter the manner in which orders related to both Nasdaq and listed securities are handled. These rules became effective on January 20, 1997, with respect to exchange-listed securities and a limited number of Nasdaq securities, and are being phased in with respect to additional Nasdaq securities during 1997. Additionally, in June 1997, most major U.S. securities markets, including Nasdaq and the New York Stock Exchange, began quoting and trading securities in increments of one-sixteenth dollar per share instead of one-eighth dollar per share for most securities, and these markets are currently considering a further change to decimal pricing. Mainly as a result of these regulatory changes and changes in industry customs and practices, average revenue per principal transaction declined during the second quarter of 1997 as compared to the second quarter of 1996. These and future regulatory changes and changes in industry customs and practices are expected to result in further significant declines in average revenue per principal transaction, and are expected to have a material adverse impact on M&S' revenues and profit margin. During 1994, the SEC commenced an investigation into the Nasdaq market and the activities of broker-dealers, including M&S, who act as market makers in Nasdaq securities. M&S has provided documents and testimony and is cooperating with the SEC investigation, which the SEC has stated is continuing. See "Commitments and Contingencies" note in the Notes to Condensed Consolidated Financial Statements regarding certain civil litigation relating to various principal transaction activities. Net Interest Revenue Net interest revenue increased $20 million, or 32%, to $82 million in the second quarter of 1997 from the comparable period in 1996 as shown in the following table (in millions): - ------------------------------------------------------------ Three Months Ended June 30, 1997 1996 - ------------------------------------------------------------ Interest Revenue Margin loans to customers $ 111 $ 84 Investments, customer-related 96 74 Other 8 5 - ------------------------------------------------------------ Total 215 163 - ------------------------------------------------------------ Interest Expense Customer cash balances 116 87 Stock-lending activities 10 7 Borrowings 5 5 Other 2 2 - ------------------------------------------------------------ Total 133 101 - ------------------------------------------------------------ Net Interest Revenue $ 82 $ 62 ============================================================ Customer-related daily average balances, interest rates and average net interest margin for the second quarters of 1997 and 1996 are summarized in the following table (dollars in millions): - ----------------------------------------------------------------- Three Months Ended June 30, 1997 1996 - ----------------------------------------------------------------- Interest-Earning Assets (customer-related): Investments: Average balance outstanding $ 7,193 $5,655 Average interest rate 5.36% 5.24% Margin loans to customers: Average balance outstanding $ 5,774 $4,483 Average interest rate 7.73% 7.54% Average yield on interest-earning assets 6.42% 6.26% Funding Sources (customer-related and other): Interest-bearing customer cash balances: Average balance outstanding $10,406 $8,079 Average interest rate 4.47% 4.32% Other interest-bearing sources: Average balance outstanding $ 1,108 $ 778 Average interest rate 4.56% 4.31% Average noninterest-bearing portion $ 1,453 $1,281 Average interest rate on funding sources 3.98% 3.77% Summary: Average yield on interest-earning assets 6.42% 6.26% Average interest rate on funding sources 3.98% 3.77% - ----------------------------------------------------------------- Average net interest margin 2.44% 2.49% ================================================================= The increase in net interest revenue from the prior year's second quarter was primarily due to higher levels of average earning assets. Expenses Excluding Interest Compensation and benefits expense for the second quarter of 1997 increased $24 million, or 12%, to $224 million from the prior year's second quarter primarily due to an increase in salaries and wages resulting from a larger number of employees, partially offset by a decrease in variable compensation. During the second quarters of 1997 and 1996, variable compensation represented 20% and 31%, respectively, of total compensation and benefits expense. At June 30, 1997, the Company had full-time, part-time and temporary employees, and persons employed on a contract basis that represented the equivalent of approximately 11,200 full-time employees, compared to approximately 9,400 at June 30, 1996. Compensation for temporary employees, contractors and overtime hours accounted for $33 million and $20 million of total compensation and benefits expense during the second quarters of 1997 and 1996, respectively. Advertising and market development expense increased $8 million, or 45%, to $26 million from the prior year's second quarter primarily due to increased media, print and direct mail advertisements relating to campaigns covering Mutual Fund OneSource(registered trademark) and online investing services, as well as new product and service offerings. The Company's effective income tax rate for the second quarter of 1997 was 39.5% compared to 40.9% for the comparable period in 1996. Six Months Ended June 30, 1997 Compared To Six Months Ended June 30, 1996 Financial Overview Net income for the first half of 1997 totaled $131 million, up 12% from first half 1996 net income of $117 million. Earnings per share for the first half of 1997 increased 11% to $.72 per share from $.65 per share for the first half of 1996. Revenues for the first six months of 1997 were $1,066 million, up 14% from $939 million for the first six months of 1996, due to increases in all revenue categories except for a decline in principal transaction revenues. During the first half of 1997, total daily average trades, which include revenue trades and Mutual Fund OneSource trades, totaled 100,400, up 20% from 83,500 daily average trades for the same period last year. A total of 34,800 daily average trades were generated through online brokerage channels during the first half of 1997, up 83% from 19,000 daily average trades for the same period last year. A total of 13,300 daily average trades were generated through TeleBroker(registered trademark) during the first half of 1997, down 6% from 14,100 daily average trades for the same period last year. Total operating expenses excluding interest during the first half of 1997 were $850 million, up 15% from $740 million for the first half of 1996, primarily resulting from additional staff to support the Company's growth and expansion, as well as an increase in advertising and market development spending. The after-tax profit margin for the first half of 1997 was 12.3%, down from 12.5% for the first half of 1996. The annualized return on stockholders' equity for the first half of 1997 was 28%, down from 34% for the first half of 1996, reflecting the Company's higher equity base in the first half of 1997. Commissions Commission revenues for the Company were $536 million for the first half of 1997, up $34 million, or 7%, from the first half of 1996. Commissions earned on customer revenue trades, excluding commissions on trades with specialists, were $533 million for the first half of 1997, compared to $498 million for the first half of 1996. Daily average revenue trades were 66,000 in the first half of 1997, compared to 55,600 for the comparable period in 1996. The Company's total revenue trades have increased as its customer base has continued to grow. However, this increase was partially offset by a decline in average commission per revenue trade. Average commission per revenue trade declined due to a higher proportion of trades placed through electronic brokerage channels, which provide additional commission discounts from the Company's standard rates. - ------------------------------------------------------------ Six Months Commissions Earned Ended on Customer Revenue June 30, Percent Trades 1997 1996 Change - ------------------------------------------------------------ Customer accounts that traded during the period (in thousands) 1,541 1,352 14% Average customer revenue trades per account 5.35 5.18 3 Total revenue trades (in thousands) 8,251 7,009 18 Average commission per revenue trade $64.57 $71.11 (9) Commissions earned on customer revenue trades (in millions) $ 533 $ 498 7 ============================================================ Schwab added a record 587,000 new customer accounts during the first half of 1997, an increase of 15% from the 509,000 new accounts added during the first half of 1996. Mutual Fund Service Fees Mutual fund service fees increased $52 million, or 36%, to $197 million in the first half of 1997 from the comparable period in 1996. This increase between the six-month periods is generally attributable to the factors described in the comparison between the three-month periods. Principal Transactions Principal transaction revenues decreased $2 million, or 1%, to $133 million in the first half of 1997 from the comparable period in 1996. This decrease was primarily due to lower average revenue per principal transaction mainly due to the impact of regulatory changes and changes in industry customs and practices (see discussion in the comparison between the three-month periods), partially offset by higher trading volume handled by M&S. Net Interest Revenue Net interest revenue increased $38 million, or 31%, to $159 million in the first half of 1997 from the comparable period in 1996 as shown in the following table (in millions): - ------------------------------------------------------------ Six Months Ended June 30, 1997 1996 - ------------------------------------------------------------ Interest Revenue Margin loans to customers $210 $161 Investments, customer-related 190 149 Other 15 11 - ------------------------------------------------------------ Total 415 321 - ------------------------------------------------------------ Interest Expense Customer cash balances 225 173 Stock-lending activities 18 12 Borrowings 9 9 Other 4 6 - ------------------------------------------------------------ Total 256 200 - ------------------------------------------------------------ Net Interest Revenue $159 $121 ============================================================ Customer-related daily average balances, interest rates and average net interest margin for the first six months of 1997 and 1996 are summarized in the following table (dollars in millions): - ------------------------------------------------------------------ Six Months Ended June 30, 1997 1996 - ------------------------------------------------------------------ Interest-Earning Assets (customer-related): Investments: Average balance outstanding $ 7,211 $5,646 Average interest rate 5.32% 5.32% Margin loans to customers: Average balance outstanding $ 5,563 $4,255 Average interest rate 7.62% 7.60% Average yield on interest-earning assets 6.32% 6.30% Funding Sources (customer-related and other): Interest-bearing customer cash balances: Average balance outstanding $10,253 $7,935 Average interest rate 4.42% 4.39% Other interest-bearing sources: Average balance outstanding $ 1,043 $ 713 Average interest rate 4.47% 4.37% Average noninterest-bearing portion $ 1,478 $1,253 Average interest rate on funding sources 3.91% 3.83% Summary: Average yield on interest-earning assets 6.32% 6.30% Average interest rate on funding sources 3.91% 3.83% - ------------------------------------------------------------------ Average net interest margin 2.41% 2.47% ================================================================== The increase in net interest revenue from the prior year's first half was primarily due to higher levels of average earning assets. Expenses Excluding Interest Compensation and benefits expense for the first half of 1997 increased $49 million, or 12%, to $445 million from the prior year's first half primarily due to an increase in salaries and wages resulting from a larger number of employees, partially offset by a decrease in variable compensation. During the first six months of 1997 and 1996, variable compensation represented 21% and 28%, respectively, of total compensation and benefits expense. Compensation for temporary employees, contractors and overtime hours accounted for $64 million and $43 million of total compensation and benefits expense during the first six months of 1997 and 1996, respectively. Advertising and market development expense increased $22 million, or 54%, to $62 million from the prior year's first half. This increase between the six-month periods is generally attributable to the factors described in the comparison between the three-month periods. The Company's effective income tax rate for the first half of 1997 was 39.5% compared to 41.0% for the comparable period in 1996. Liquidity and Capital Resources Liquidity Schwab Liquidity needs relating to customer trading and margin borrowing activities are met primarily through cash balances in customer accounts, which totaled $11.4 billion and $10.9 billion at June 30, 1997 and December 31, 1996, respectively. Earnings from Schwab's operations are the primary source of liquidity for capital expenditures and investments in new services, marketing and technology. Management believes that customer cash balances and operating earnings will continue to be the primary sources of liquidity for Schwab in the future. To manage Schwab's regulatory capital position, CSC provides Schwab with a $250 million subordinated revolving credit facility maturing in September 1998, of which $220 million was outstanding at June 30, 1997. At quarter end, Schwab also had outstanding $25 million in fixed-rate subordinated term loans from CSC maturing in 1999. Borrowings under these subordinated lending arrangements qualify as regulatory capital for Schwab. For use in its brokerage operations, Schwab maintained uncommitted, unsecured bank credit lines totaling $550 million at June 30, 1997. Schwab used such borrowings for six days during the first six months of 1997, with the daily amounts borrowed averaging $54 million. These lines were unused at June 30, 1997. M&S M&S' liquidity needs are generally met through earnings generated by its operations. Most of M&S' assets are liquid, consisting primarily of receivables from brokers, dealers and clearing organizations, marketable securities, and cash and cash equivalents. M&S may borrow up to $35 million under a subordinated lending arrangement with CSC. Borrowings under this arrangement qualify as regulatory capital for M&S. This facility was unused at June 30, 1997. CSC CSC's liquidity needs are generally met through cash generated by its subsidiaries, as well as cash provided by external financing. Schwab and M&S are subject to regulatory requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations would prohibit Schwab and M&S from repaying subordinated borrowings to CSC, paying cash dividends, or making any unsecured advances or loans to their parent or employees if such payment would result in net capital of less than 5% of their aggregate debit balances or less than 120% of their minimum dollar amount requirement of $1 million. At June 30, 1997, Schwab had $624 million of net capital (10% of aggregate debit balances), which was $500 million in excess of its minimum required net capital. At June 30, 1997, M&S had $8 million of net capital (331% of aggregate debit balances), which was $7 million in excess of its minimum required net capital. Management believes that funds generated by the operations of CSC's subsidiaries will continue to be the primary funding source in meeting CSC's liquidity needs and maintaining Schwab's and M&S' net capital. CSC has individual liquidity needs that arise from its issued and outstanding $288 million Senior Medium-Term Notes, Series A (Medium-Term Notes), as well as from the funding of cash dividends, common stock repurchases and acquisitions. The Medium-Term Notes have maturities ranging from 1997 to 2005 and fixed interest rates ranging from 5.32% to 7.72% with interest payable semiannually. The Medium-Term Notes are rated A3 by Moody's Investors Service and BBB+ by Standard & Poor's Ratings Group. As of June 30, 1997, CSC had a prospectus supplement on file with the SEC enabling CSC to issue up to $196 million in Senior or Senior Subordinated Medium-Term Notes, Series A. At June 30, 1997, $186 million of these notes remained unissued. CSC may borrow under its $350 million committed, unsecured credit facility with a group of 11 banks through June 1998. The funds are available for general corporate purposes for which CSC pays a commitment fee on the unused balance. The terms of this facility require CSC to maintain a minimum level of stockholders' equity and Schwab and M&S to maintain minimum levels of net capital, as defined. This facility was not used in the first half of 1997. See "Commitments and Contingencies" note in Part I - Financial Information, Item 1., Notes to Condensed Consolidated Financial Statements. Cash Flows and Capital Resources Net income plus depreciation and amortization was $188 million for the first six months of 1997, up 14% from $165 million for the first six months of 1996. Depreciation and amortization expense related to equipment, office facilities and property totaled $52 million for the first half of 1997, as compared to $42 million for the same period in the prior year. Amortization expense related to intangible assets totaled $5 million and $6 million for the first six-month periods of 1997 and 1996, respectively. During the first six months of 1997, the Company's capital expenditures totaled $70 million for equipment and office facilities relating to continued enhancements of its data processing and telecommunications systems. In addition, the Company opened 19 new branch offices during the first six months of 1997, compared to eight branch offices opened during the comparable period in 1996. As has been the case recently, capital expenditures will vary from period to period as business conditions change. The Company issued $10 million in Medium-Term Notes during the first half of 1997. During the first six months of 1997, the Company repurchased and recorded as treasury stock a total of 500,000 shares of its common stock for approximately $16 million. As of June 30, 1997, authorization granted by the Company's Board of Directors allowed for the repurchase of an additional 871,000 shares. In July 1997, the Board of Directors approved a three-for-two split of the Company's common stock, which will be effected in the form of a 50% stock dividend. The stock dividend is payable September 15, 1997 to stockholders of record August 14, 1997. Share and per share data have not been restated to reflect this transaction. During the first six months of 1997, the Company paid common stock cash dividends totaling $18 million, up from $14 million paid during the first six months of 1996. The Company monitors both the relative composition and absolute level of its capital structure. The Company's stockholders' equity at June 30, 1997 totaled $993 million. In addition, the Company had borrowings of $289 million that bear interest at a weighted-average rate of 6.50%. These borrowings, together with the Company's equity, provided total financial capital of $1,282 million at June 30, 1997, up $143 million, or 13% from the December 31, 1996 level of $1,139 million. PART II - OTHER INFORMATION Item 1. Legal Proceedings The discussion of legal proceedings in Notes to Condensed Consolidated Financial Statements, under "Commitments and Contingencies" in Part I - Financial Information, Item 1., as well as in "Principal Transactions" in Management's Discussion and Analysis in Part I, Item 2., is incorporated herein by reference. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Stockholders held on May 12, 1997, its stockholders voted upon the following proposals (share amounts have not been restated to reflect the effects of the three-for-two common stock split declared July 16, 1997, payable September 15, 1997): Proposal No. 1 - Election of Three Directors: Shares Shares For Against ------ ------- David S. Pottruck 158,419,665 4,031,996 Nancy H. Bechtle 161,418,632 1,033,029 C. Preston Butcher 158,574,611 3,877,050 There were no abstentions or broker non-votes with respect to the election of directors. Proposal No. 2 - Amendment to the 1992 Stock Incentive Plan -- Amendment to the 1992 Stock Incentive Plan to increase the total number of shares under this Plan. Shares Shares Broker For Against Abstentions Non-Votes ------ ------- ----------- --------- 125,805,463 17,034,932 908,315 18,702,951 Proposal No. 3 - Stockholder Proposal Requesting that the Board of Directors Amend the Certificate of Incorporation -- Stockholder proposal requesting that the Board of Directors amend the Certificate of Incorporation to reinstate stockholder rights to act by written consent and to call special meetings. Shares Shares Broker For Against Abstentions Non-Votes ------ ------- ----------- ----------- 31,336,211 110,559,664 1,399,828 19,155,958 A total of 162,451,661 shares were present in person or by proxy at the Annual Meeting. Item 5. Other Information On July 16, 1997, George P. Schultz, former U.S. Secretary of State, was elected to the Company's Board of Directors, expanding it to 11 members. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this quarterly report on Form 10-Q. - -------------------------------------------------------------------------------- Exhibit Number Exhibit - -------------------------------------------------------------------------------- 10.116 Second Amendment to the Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan effective July 1, 1992, dated June 30, 1992. 10.168 Charles Schwab Profit Sharing and Employee Stock Ownership Plan, as amended through December 13, 1996 (supersedes Exhibit 10.152 to the Registrant's Form 10-Q for the quarter ended June 30, 1995). 10.169 Third Amendment to the Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan effective January 1, 1996, dated May 8, 1996. 10.170 The Charles Schwab Corporation 1992 Stock Incentive Plan Restated as of May 12, 1997 (supersedes Exhibit 10.141 to the Registrant's Form 10-Q for the quarter ended September 30, 1994). 10.171 Form of Restricted Shares Award Agreement of The Charles Schwab Corporation 1992 Stock Incentive Plan (supersedes Exhibit 4.6 to the Registrant's Registration Statement No. 33-54701 on Form S-8). 10.172 Form of Nonstatutory Stock Option Agreement of The Charles Schwab Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.143 to the Registrant's Form 10-Q for the quarter ended September 30, 1994). 10.173 Form of Nonstatutory Stock Option and Performance Unit Agreement of The Charles Schwab Corporation 1992 Stock Incentive Plan. 10.174 Form of Incentive Stock Option Agreement of The Charles Schwab Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.144 to the Registrant's Form 10-Q for the quarter ended September 30, 1994). 10.175 Form of Restricted Shares Award Agreement with performance vesting conditions of The Charles Schwab Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.155 to the Registrant's Form 10-Q for the quarter ended September 30, 1995). 10.176 Form of Nonstatutory Stock Option Agreement of The Charles Schwab Corporation 1987 Stock Option Plan (supersedes Form of Non-Qualified Stock Option Agreement in Exhibit 10.167 to the Registrant's Form 10-Q for the quarter ended March 31, 1997). 10.177 Form of Incentive Stock Option Agreement of The Charles Schwab Corporation 1987 Stock Option Plan. 10.178 Form of Restricted Shares Award Agreement of The Charles Schwab Corporation 1987 Stock Option Plan. 10.179 Form of Nonstatutory Stock Option Agreement of The Charles Schwab Corporation 1987 Executive Officer Stock Option Plan (supersedes Form of Non-Qualified Stock Option Agreement in Exhibit 10.166 to the Registrant's Form 10-Q for the quarter ended March 31, 1997). 10.180 Form of Restricted Shares Award Agreement of The Charles Schwab Corporation 1987 Executive Officer Stock Option Plan. 11.1 Computation of Earnings Per Share. 12.1 Computation of Ratio of Earnings to Fixed Charges. 27.1 Financial Data Schedule (electronic only). ------------------------------------------------------------------------------- (b) Reports on Form 8-K None. THE CHARLES SCHWAB CORPORATION SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE CHARLES SCHWAB CORPORATION (Registrant) Date: July 29, 1997 /s/ Steven L. Scheid ------------- ----------------------------- Steven L. Scheid Executive Vice President and Chief Financial Officer EX-10 2 EXHIBIT 10.116 Exhibit 10.116 SECOND AMENDMENT TO THE TRUST AGREEMENT FOR THE CHARLES SCHWAB PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN The Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan ("Plan"), which was amended and restated in its entirety effective November 1, 1990, and further amended effective January 1, 1992, is hereby further amended effective July 1, 1992, to reflect the appointment of The Charles Schwab Trust Company to act as successor trustee under the Plan and Trust Agreement, and as follows: 1. Each reference to "Security Pacific National Bank" is replaced by "The Charles Schwab Trust Company." 2. The last two sentences of Section 5.05(a) are revised to read as follows: Investment in such Employer Securities shall be made from time to time by a direct issue of such Employer Securities from the Employer (in the event of Employer Securities used to fund the employee stock ownership plan only) or by purchase through a Purchasing Agent designated by the Trustee to effect all purchases of Employer Securities. The Purchasing Agent shall not in any event be The Charles Schwab Corporation or any of its affiliates or subsidiaries. The Purchasing Agent shall invest such funds as are paid over to the Purchasing Agent from time to time in Employer Securities at the time, in the amount, in the manner and at the price determined by the Purchasing Agent in its sole discretion, provided such price shall be the fair market value of such securities on the open market. The Purchasing Agent shall hold such assets as an agent of the Trustee and shall be a fiduciary to the Plan, but only with respect to those assets under its management and control and only with respect to its determinations as to the timing, price and amount of purchases of Employer Securities and the selection of the broker, but the Purchasing Agent shall have no discretion as to whether or not purchases of Employer Securities shall be made. The Purchasing Agent shall sell shares of Employer Securities at the direction of the Trustee, but at the time, in the manner and at the price determined by the Purchasing Agent, provided such price shall be the fair market value of such securities on the open market. The Trustee shall instruct the Purchasing Agent to sell shares of Employer Securities only if the Plan Administrator has directed the Trustee to arrange for such sale and only if such sale is previously approved by the Board of Directors to the extent required under Section 10.01 of the Plan. 3. Section 5.05(b) is amended to read as follows: (b) The Trustee shall pay over all contributions to the employee stock ownership plan, and such contributions and assets of the profit sharing plan that are to be invested in Employer Securities, to the Purchasing Agent for investment in Employer Securities. 4. Section 5.05(c) is amended to read as follows: Cash dividends received on any Employer Securities held as part of the profit sharing plan shall be paid over to the Purchasing Agent and invested as soon as practicable in additional shares of Employer Securities. Cash dividends received on any Employer Securities allocated to a Participant's Account and held as part of the employee stock ownership plan shall be paid over to the Purchasing Agent and invested as soon as practicable in additional shares of Employer Securities. Cash dividends received on Employer Securities held in the suspense account (e.g., unallocated shares of Employer Securities held as part of the employee stock ownership plan) shall be used as provided in Section 10.08 of the Plan. 5. Section 5.05(d) is amended to read as follows: The Purchasing Agent shall invest funds awaiting investment in Employer Securities in short-term obligations, including obligations of the United States of America or any agency or instrumentality thereof, trust and participation certificates, beneficial interests in any trust and such other short-term obligations as the Purchasing Agent deems to be appropriate for such interim investment purposes, provided however that the Purchasing Agent may hold in cash without liability for interest such portion of the assets under its control that in its discretion shall be reasonable under the circumstances, pending investments, or payment of expenses, or the distribution of benefits. The Purchasing Agent is authorized to invest in any common, collective or pooled fund maintained by the Purchasing Agent as provided in Section 7.03. 6. Section 5.05(f) is amended to read as follows: Voting or proxy or other rights with respect to Employer Securities shall be disposed of as provided in this Section. With respect to Employer Securities that are allocated to Participants' Accounts, each Participant shall be entitled to direct the Purchasing Agent as to the manner in which such Employer Securities then allocated to his Account shall be voted. Such directions may be achieved through the use of proxy or similar statements delivered by the Purchasing Agent to the Participants with respect to the Employer Securities allocated to their Accounts. The Plan Administrator shall provide any information requested by the Purchasing Agent that is necessary or convenient in connection with obtaining and preserving the confidentiality of the Participants' directions. Any allocated Employer Securities with respect to which Participants are entitled to issue directions pursuant to the foregoing and for which such directions are not received by the Purchasing Agent shall not be voted by the Purchasing Agent. All unallocated Employer Securities shall be voted by the Purchasing Agent, provided however that the Purchasing Agent shall vote such unallocated Employer Securities in the same proportion as the shares of Employer Securities for which Participant voting instructions have been received as provided in the agreement between the Employer and the New York Stock Exchange. 7. Article XI is amended by the addition of the following sections at the end: Section 11.09 Disclosure. The Trustee is authorized to disclose such information as is necessary to the operation and administration of the trust fund to any of its affiliates, and to such other persons and organizations that the Trustee determines have a legitimate business reason for obtaining such information. Section 11.10 Recording. The Trustee is authorized to record conversations between itself and the Plan Administrator, an Investment Manager, the Employer and other persons acting on behalf of the Plan. Section 11.11 Affiliates. The Trustee is authorized to contract or make other arrangements with The Charles Schwab Corporation and any of its affiliates, subsidiaries, successors and assigns, and any other organizations affiliated with, or subsidiaries of, the Trustee or related entities, for the provision of services to the Plan and trust fund. Section 11.12 Trades. The Trustee is authorized to place securities orders, settle securities trades, hold securities in custody and perform related activities on behalf of the trust fund through or by Charles Schwab & Co., Inc. to the extent that the Trustee may select the broker-dealer. Trades and related activities effected through Charles Schwab & Co., Inc. shall not be subject to fees and commissions established by Charles Schwab & Co., Inc. Transactions effected by Schwab shall be subject to Schwab's trading rules and policies as modified or amended from time to time, together with the applicable rules, regulations, customs and usages of any exchange, market, clearing house or self-regulatory organization and the applicable federal and state laws, rules and regulations. Section 11.13 Mutual Funds. The Trustee is authorized to invest in shares of regulated investment companies (or other investment vehicles) advised by affiliates of The Charles Schwab Corporation and any of its affiliates, subsidiaries, successors and assigns, and any other organizations affiliated with, or subsidiaries of, the Trustee or related entities, or by the Trustee itself. Section 11.14 Lien. The Trustee shall have a lien on the trust fund for compensation and for any reasonable expenses incurred by the Trustee, including counsel, appraisal or accounting fees as provided in Section 4.04, and such amounts may be withdrawn from the trust fund if not paid by the Employer within a reasonable time after the Trustee mails a written billing. Executed this 30th day of June 1992. CHARLES SCHWAB & CO., INC. By /s/ Charles R. Schwab CHARLES SCHWAB TRUST COMPANY By /s/ Harvey A. Rowen EX-10 3 EXHIBIT 10.168 Exhibit 10.168 CHARLES SCHWAB PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN AMENDED through December 13th, 1996, CHARLES SCHWAB PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN AMENDED through December 13th, 1996, Table of Contents Section Page 1 Introduction and Purpose......................................... 1 2 Definitions...................................................... 2 3 Participation.................................................... 15 4 Employer Contributions........................................... 17 5 Salary Reduction Agreements and Rollover Contributions........... 25 6 Allocation of Contributions...................................... 31 7 Special ESOP Provisions.......................................... 32 8 Investment of Contributions, Valuations and Participants' Cash Contribution Accounts.......................................... 39 9 Retirement Dates................................................. 41 10 Eligibility for Payment of Accounts and Vested Interests........ 42 11 Method of Payment of Accounts and Withdrawals.................... 46 12 Maximum Amount of Allocation..................................... 57 13 Voting Rights.................................................... 59 14 Designation of Beneficiaries..................................... 63 15 Administration of the Plan....................................... 64 16 Expenses......................................................... 69 17 Employer Participation........................................... 70 18 Amendment or Termination of the Plan............................. 73 19 Top-Heavy Plan Requirements...................................... 76 20 General Limitations and Provisions............................... 82 21 Application to Puerto Rico Employees............................. 91 CHARLES SCHWAB PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN AMENDED through December 13th, 1996 SECTION 1. INTRODUCTION AND PURPOSE 1.1 The Plan Sponsor has established and maintains the Plan to enable each Participant to benefit, in accordance with the terms of the Plan, from contributions made by the Employer and from any increases in the value of the Plan assets through investment of such assets. The Plan is comprised of three parts: (i) a Section 401(k) plan, (ii) a profit sharing plan and (iii) an employee stock ownership plan. The purpose of the employee stock ownership plan portion of the Plan is to align Employees' interests with the interests of shareholders. It is anticipated that Employer contributions to the employee stock ownership plan will be invested primarily or entirely in Shares of The Charles Schwab Corporation, that the employee stock ownership plan may acquire such Shares of The Charles Schwab Corporation from time to time with the proceeds of one or more Exempt Loans, the repayment of which may be secured in part by a pledge of the Shares of The Charles Schwab Corporation acquired with those loan proceeds, and that Employer contributions to the employee stock ownership plan may be used in full or in substantial part to the payment of interest on, and retirement of principal of, such Exempt Loans. This Plan is a restatement of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan, which was initially effective as of October 1, 1983. The effective date of this restatement is December 13, 1996. The rights of any person who terminated employment or who retired on or before the effective date of this restated Plan or any provision hereof, including his or her eligibility for benefits and the time and form in which benefits, if any, will be paid, shall be determined solely under the terms of the Plan provisions as in effect on the date of his or her termination of employment or retirement, unless such person is thereafter reemployed and again becomes a Participant. The rights of any other person shall be determined solely under the terms of this restated Plan, except as may otherwise be required by law. The Plan and Trust are intended to qualify as a plan and trust which are qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code. The Plan is intended to qualify in part as a profit sharing plan (as defined in Section 401(a)(27) of the Code) and in part as a stock bonus plan and an employee stock ownership plan (as defined by Section 4975(e)(7) of the Code and Section 407(d)(6) of the Act) designed to invest primarily in shares of stock of the Employer which meet the requirements for "qualifying employer securities" under Section 4975(e)(8) of the Code and Section 407(d)(5) of the Act. All provisions of the Plan and Trust shall be construed accordingly. All Trust Fund assets acquired under the Plan as a result of debt incurred to purchase Shares, Employer contributions, income and other additions to the Trust Fund shall be administered, distributed, forfeited and otherwise governed by the provisions of the Plan. It is intended that the Trust associated with the Plan be exempt from federal income taxation pursuant to the provisions of Section 501(a) of the Code. Subject to the provisions of Section 16 of the Plan, the assets of the Plan shall be applied exclusively for the purposes of providing benefits to Participants and Beneficiaries under the Plan and for defraying expenses incurred in the administration of the Plan and its corresponding Trust. SECTION 2. DEFINITIONS When used herein the following terms shall have the following meanings: 2.1 "Account" means the account or accounts established and maintained on behalf of a Participant pursuant to (i) Section 6.1 with respect to the Participant's Cash Contribution Account and (ii) Section 7.1 with respect to the Participant's ESOP Account. 2.2 "Act" means the Employee Retirement Income Security Act of 1974, as now in effect or as hereafter amended. 2.3 "Actual Deferral Percentage" means the average of the ratios (calculated separately for each Employee) for each Plan Year of (a) the amount of Elective Contributions and Matching Contributions or Qualified Nonelective Contributions (if the Committee determines to take such Matching Contributions or such Qualified Nonelective Contributions into account when calculating Actual Deferral Percentage) on behalf of each Employee for such Plan Year to (b) the Employee's compensation (as defined in Treasury Regulation 1.415-2(d)(10)) while a Participant for such Plan Year. 2.4 "Affiliated Employer" means any corporation which is included in a controlled group of corporations (within the meaning of Section 414(b) of the Code) which includes the Plan Sponsor, any trade or business (whether or not incorporated) which is under common control with the Plan Sponsor (within the meaning of Section 414(c) of the Code), any organization included in the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Plan Sponsor and any other entity required to be aggregated with the Plan Sponsor pursuant to the Regulations under Section 414(o) of the Code; except that for purposes of applying the provisions of Sections 12 and 19 with respect to the limitations on contributions, Section 415(h) of the Code shall apply. 2.5 "Beneficiary" means the beneficiary or beneficiaries designated by a Participant pursuant to Section 14 to receive the amount, if any, payable under the Plan upon the death of such Participant. 2.6 "Board of Directors" means the board of directors of Charles Schwab & Co., Inc. 2.7 "Break in Service" means a Plan Year (or for purposes of determining membership in the Plan pursuant to Section 3, the Computation Period) during which an individual has not completed more than 500 Hours of Service, as determined by the Committee in accordance with the Regulations. A Break in Service shall be deemed to have commenced on the first day of the Plan Year in which it occurs. Solely for purposes of determining whether a Break in Service has occurred, an individual shall be credited with the Hours of Service which such individual would have completed but for a maternity or paternity absence, as determined by the Committee in accordance with this Section 2.7 and the Code and Regulations; provided, however, that the total Hours of Service so credited shall not exceed 501 Hours of Service and that the individual shall timely provide the Committee with such information as it shall require. Hours of Service credited for a maternity or paternity absence shall be credited at eight Hours of Service per day and shall be credited entirely (i) in the Plan Year or Computation Period in which the absence began if such Hours of Service are necessary to prevent a Break in Service in such Plan Year, or (ii) in the following Plan Year or Computation Period. For purposes of this Section 2.7, maternity or paternity absence shall mean an absence from work by reason of the individual's pregnancy, the birth of the individual's child or the placement of a child with the individual in connection with adoption of the child by such individual, or for purposes of caring for a child for the period immediately following such birth or adoption. 2.8 "Cash Contribution Account" means the account or accounts established and maintained on behalf of a Participant pursuant to Section 6.1 with respect to the Participant's Elective Contributions, Matching Contributions, Profit Sharing Contributions, Qualified Nonelective Contributions or Rollover Contributions. 2.9 "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered. 2.10 "Committee" means the Administrative Committee of the Employer provided for in Section 15. For purposes of the Act, the Employer shall be the "named fiduciary" (with respect to the matters for which it is hereby responsible under the Plan) of the Plan, and the Employer shall be the "plan administrator" of the Plan within the meaning of Section 3(16)(A) of the Act. 2.11 "Compensation" means a Participant's W-2 compensation related to services rendered to the Employer, excluding (i) living allowances, (ii) travel or commuting allowances, (iii) reimbursements for financial planning, (iv) amounts that are paid as a result of participation in the Employer's Long-Term Incentive Plan, (v) employee referral awards, (vi) special incentive awards (other than regular bonus programs), (vii) reimbursements for relocation expenses, (viii) commissions (other than "dual commissions", commissions based on trading results that are paid to traders who are also salaried and commissions where the Participant's only form of remuneration is commissions), (ix) income items attributable to the taxable portion of employee benefits and any cash payments made as a result of an Employee's election not to receive insured benefits pursuant to the Company's Pre-Tax Contribution Plan, (x) amounts paid as short term disability benefits, (xi) any income items reflecting grants in aid, and (xii) compensation in excess of $150,000 (adjusted for cost of living to the extent permitted by Section 401(a)(17) of the Code and Regulations). For purposes of determining the whole percentage of Compensation for which a Participant may make a Salary Reduction Agreement, and not for any other purposes, subparagraph (ix) hereof shall be disregarded. Compensation shall be determined prior to reduction for any contributions pursuant to such Participant's election under Section 5.1, and any elective contributions made by the Employer on behalf of the Participant in the Plan Year that are not includable in gross income under Section 125 of the Code. Any Compensation paid to any Participant who is a member of the family of a five percent (5% ) owner or one of the ten most Highly Compensated Participants, as defined in Section 414(q)(6) of the Code, shall be treated as if it were paid to or on behalf of such five percent (5%) owner or Highly Compensated Participant. For purposes of the previous sentence, the term "family" means the Participant's spouse and any of the Participant's lineal descendants who have not attained age 19 before the end of the Plan Year. 2.12 "Computation Period" means a 12 consecutive month period beginning on the day an individual first performs an Hour of Service or first performs an Hour of Service following a Break in Service. Thereafter, the Computation Period shall be the Plan Year, commencing with the Plan Year that includes the day immediately following the last day of the Computation Period determined pursuant to the first sentence hereof. 2.13 "Contribution Percentage" means the average of the ratios (calculated separately for each Participant for each Plan Year) of (a)(i) Matching Contributions, if any, made by the Employer on behalf of a Participant and (ii) Elective Contributions, (if the Committee elects to take into account Elective Contributions when calculating the Contribution Percentage) to (b) the Employee's compensation while a Participant (as defined in Section 1.415-2(d)(10) of the Regulations) for such Plan Year. 2.14 "Deferred Retirement Date" shall have the meaning set forth in Section 9.2. 2.15 "Disability" means the inability to engage in any substantial gainful activity considering the Participant's age, education and work experience by reason of any medically determined physical or mental impairment that has continued without interruption for a period of at least six months and that can be expected to be of long, continued and indefinite duration. The determination of the Committee as to whether a Participant has a Disability shall be final, binding and conclusive. 2.16 "Effective Date" means October 1, 1983. 2.17 "Elective Contributions" means contributions made to the Trust Fund pursuant to a Participant's Salary Reduction Agreement entered into pursuant to Section 5.1, and which are considered tax deferred under Section 401(k) of the Code. 2.18 "Elective Contribution Subaccount" means the account established and maintained on behalf of a Participant pursuant to Section 6.2(a) with respect to his or her Elective Contributions and Qualified Nonelective Contributions. 2.19 "Employee" means any "regular employee" of the Employer, excluding (i) any person covered by any other pension, profit sharing or retirement plan to which any Employer or Affiliated Employer is required to contribute either directly or indirectly, (ii) any nonresident alien individual who received no earned income (within the meaning of Section 911(d)(2)) from the Employer which constitutes income from sources within the United States and (iii) any employee who is included in a unit of employees covered by a negotiated collective bargaining agreement which does not provide for his or her membership in the Plan. A director of the Employer is not eligible for membership in the Plan unless such director is also an Employee. A leased employee (within the meaning of Section 414(n) of the Code) is not eligible for membership in the Plan unless the Employer designates such individual as eligible for membership in the Plan. 2.20 "Employer" means Charles Schwab & Co., Inc. and any Participating Employer which adopts this Plan subject to the approval of the Board of Directors. 2.21 "ESOP Account" means the account established and maintained on behalf of a Participant pursuant to Section 7.1 with respect to his or her ESOP Contributions. 2.22 "ESOP Contributions" means the Employer contributions, if any, made to the Plan on behalf of a Participant pursuant to Section 4.2(c). 2.23 "ESOP/Profit Sharing Entry Date" means January 1 and July 1 of each calendar year. 2.24 "Exempt Loan" means any loan to the Plan or Trust not prohibited by Section 4975(c) of the Code and Section 406 of the Act because the loan meets the requirements set forth in Section 4975(d)(3) of the Code, Section 408(b)(3) of the Act and the Regulations promulgated thereunder, the proceeds of which loan are used within a reasonable time after receipt by the Trust Fund only for any or all of the following purposes: (a) to acquire Shares; (b) to repay the same Exempt Loan; or (c) to repay any previous Exempt Loan. 2.25 "Highly Compensated Participant" means any Participant who, during the relevant period is treated as a highly compensated employee under Section 414(q) of the Code. For purposes of determining which Employee is a Highly Compensated Participant, the look-back determination shall be made on the basis of the calendar year and the simplified method of Section 414(q)(12) of the Code shall be used by the Employer to the extent permissible under the Code. The Plan shall comply with the procedures of Treasury Regulation 1.401(k)-1(f) to the extent applicable. For purposes of determining which Employee is a Highly Compensated Participant: (A) Highly Compensated Participant means a Participant who performs Service during the determination year and is described in one or more of the following groups: (1) An Employee who is a five percent (5%) owner, as defined in Section 416(i)(1)(A)(iii) of the Code, at any time during the determination year or the look-back year. (2) An Employee who receives compensation in excess of $75,000 (indexed in accordance with Section 415(d) of the Code) during the look-back year. (3) An Employee who receives compensation in excess of $50,000 (indexed in accordance with Section 415(d) of the Code) during the look-back year and is a Participant of the "top-paid" group for the look-back year. (4) An Employee who is an officer, within the meaning of Section 416(i) of the Code, during the look-back year and who receives compensation in the look-back year greater than fifty percent (50%) of the dollar limitation in effect under Section 415(b)(1)(A) for the calendar year in which the look-back year begins. (5) An Employee who is both described in subparagraphs 2, 3, or 4 above when these paragraphs are modified to substitute the determination year for the look-back year and one of the 100 employees who receive the most compensation from the Employer during the determination year. (B) For purposes of this Section: (1) The determination year is the Plan Year for which the determination of who is a Highly Compensated Participant is being made. (2) The look-back year is the calendar year ending with or within the determination year. (3) The "top-paid" group consists of the top twenty percent (20%) of Employees ranked on the basis of compensation received during the past calendar year. For purposes of determining the number of Employees in the top-paid group, Employees described in Section 414(q)(8) of the Code and Q & A 9(b) of Section 1.414(q)-1T of the Regulations are excluded. (4) The number of officers is limited to 50 (or, if lesser, the greater of 3 Employees or ten percent (10%) of Employees) excluding those Employees who may be excluded in determining the top-paid group. (5) When no officer has compensation in excess of fifty percent (50%) of the Section 415(b)(1)(A) limit, the highest paid officer is treated as highly compensated. (6) For purposes of this Section 2.25, the term "compensation" means compensation as defined in Section 415(c)(3) of the Code and Treasury Regulation Section 1.415-2(d)(10), determined without reduction for any elective or salary reduction contributions to a cafeteria plan or cash or deferred arrangement. (7) Employers aggregated under Section 414(b), (c), (m), or (o) of the Code are treated as a single employer. (8) Highly Compensated Participants include a former Employee who had a separation year prior to the determination year and who was a Highly Compensated Participant for either (A) the determination year in which the Employee separated from Service or (B) any determination year ending on or after the Employee's 55th birthday. With respect to an Employee who separated from Service before January 1, 1987, an Employee will be included as a Highly Compensated Participant only if the Employee was a five percent (5%) owner or received Compensation in excess of $50,000 during (1) the determination year in which the Employee separated from Service (or the year preceding such separation year) or (2) any year ending on or after such Employee's 55th birthday (or the last year ending before such Employee's 55th birthday). 2.26 "Hours of Service" means hours during the applicable Computation Period in which an individual performs Service or is treated as performing Service and, except in the case of military service or as otherwise determined by the Committee, for which the Participant is directly or indirectly entitled to payment. For all purposes under the Plan, (i) an individual scheduled to work more than twenty hours per week shall be credited (under rules determined by the Committee, uniformly applicable to all individuals similarly situated and in accordance with the Regulations) with 190 Hours of Service for each calendar month in which the individual would otherwise be credited with one or more Hours of Service and (ii) an individual who is scheduled to work less than twenty hours per week shall be credited with Hours of Service for the applicable period in which such Hours of Service accrue in accordance with Labor Department Regulation 29 CFR ss. 2530.200b-2(c), which regulation is incorporated herein by reference. Hours of Service for reasons other than the performance of duties shall be credited in accordance with Labor Department Regulation 29 CFR ss. 2530.200b-2(b), which regulation is incorporated herein by reference. The term "Service" includes performance of duties (or periods which are treated as the performance of duties) for the Employer or for any Affiliated Employer (under rules determined by the Committee, uniformly applicable to all individuals similarly situated and in accordance with the Regulations) for which an individual is entitled to receive credit for "Service", including (i) vacation, (ii) holiday, (iii) absence authorized by the Employer for sickness or incapacity (including disability or leave of absence), (iv) layoff, (v) jury duty, (vi) if and to the extent required by the Military Selective Service Act, as amended or any other federal law, service in the Armed Forces of the United States and (vii) an approved leave of absence granted by the Employer to an individual on or after August 5, 1993 pursuant to the Family Medical Leave Act, but only if such individual returns to work for the Employer at the end of such approved leave. Service also includes periods of time for which back pay, irrespective of mitigation of damages, is awarded or agreed to by the Employer or any Affiliated Employer; provided that such award or agreement is not already credited as Service under either of the preceding two sentences. Service may also include any period of a Participant's prior employment by an organization upon such terms and conditions as the Committee may approve and subject to any required IRS approval. Notwithstanding the foregoing, (i) Hours of Service credited with respect to an individual's service with BankAmerica Corporation or a related corporation between January 11, 1983 and March 31, 1987 shall be considered Service only if such individual was employed by the Employer prior to November 24, 1993, (ii) Hours of Service credited with respect to an individual's service with BankAmerica Corporation or a related corporation prior to January 11, 1983 shall be considered Service, but only if such individual was employed by the Employer prior to April 1, 1987, (iii) Hours of Service credited with respect to service with Mayer & Schweitzer, Inc. prior to July 1, 1991 shall be considered Service, and (iv) Service shall include service with The Rose Company prior to April 1, 1989, service with Performance Technologies, Inc. prior to August 31, 1994, service with TrustMark, Inc. prior to July 31, 1995, and service with Hampton Pension Services, Inc. prior to November 6, 1995. 2.27 "IRS" means the United States Internal Revenue Service. 2.28 "Labor Department" means the United States Department of Labor. 2.29 "Matching Contribution" means any Employer contribution, if any, made to the Plan on behalf of a Participant pursuant to Section 4.2(a). 2.30 "Matching Contribution Subaccount" means the account established and maintained on behalf of a Participant pursuant to Section 6.2(b) with respect to the Participant's Matching Contributions. 2.31 "Normal Retirement Date" shall have the meaning set forth in Section 9.1. 2.32 "Participant" means any Employee who has satisfied the eligibility requirements of Section 3 below. 2.33 "Participating Employer" means Charles Schwab & Co., Inc. or any other Affiliated Employer, the board of directors or equivalent governing body of which shall adopt the Plan and Trust Agreement by appropriate action with the written consent of the Board of Directors. By its adoption of this Plan, a Participating Employer shall be deemed to appoint Charles Schwab, & Co., Inc., the Committee and the Trustee its exclusive agent to exercise on its behalf all of the power and authority conferred by this Plan upon the Employer. The authority of Charles Schwab & Co., Inc., the Committee and the Trustee to act as such agent shall continue until the Plan is terminated as to the Participating Employer and the relevant Trust Fund assets have been distributed by the Trustee as provided in Section 17 of this Plan. 2.34 "Plan" means this Charles Schwab Profit Sharing and Employee Stock Ownership Plan as the same is stated herein and as it may be amended from time to time. 2.35 "Plan Sponsor" means The Charles Schwab Corporation. 2.36 "Plan Year" means the calendar year. 2.37 "Profit Sharing Contribution" means the Employer contribution, if any, made to the Plan on behalf of a Participant pursuant to Section 4.2(b)(ii). 2.38 "Profit Sharing Subaccount" means the account established and maintained on behalf of a Participant pursuant to Section 6.2(c) with respect to the Participant's Profit Sharing Contributions. 2.39 "Purchasing Agent" means the agent designated by the Trustee to enter into certain transactions with respect to Shares hereunder. 2.40 "Qualified Nonelective Contribution" means the Employer contribution, if any, made to the Plan on behalf of a Participant pursuant to Section 4.2(b)(i). 2.41 "Regulations" means the applicable regulations issued under the Code or the Act by the IRS, the Labor Department or any other governmental authority and any temporary rules or releases promulgated by such authorities pending the issuance of such regulations. 2.42 "Restated Effective Date" shall mean January 1, 1994. 2.43 "Retirement Date" means the Participant's Normal or Deferred Retirement Date which has become effective pursuant to Section 9 below. 2.44 "Rollover Subaccount" means the account established and maintained on behalf of a Participant pursuant to Section 6.2(d) with respect to the Participant's Rollover Contributions. 2.45 "Rollover Contribution" means any contribution made by an Employee pursuant to Section 5.6. 2.46 "Salary Reduction Agreement" means an agreement between a Participant and the Employer entered into pursuant to Section 5.1. 2.47 "Section 401(k) Entry Date" means April 1 and October 1 of each calendar year. 2.48 "Shares" means (i) with respect to Plan assets acquired with the proceeds of an Exempt Loan, the common stock issued by The Charles Schwab Corporation or any successor corporation thereto meeting the requirements of both Section 4975(e)(8) of the Code and Section 407(d)(5) of the Act for "qualifying employer securities," and (ii) with respect to Plan assets other than those acquired with the proceeds of an Exempt Loan, stock issued by The Charles Schwab Corporation or any successor corporation thereto, of any type, kind or class meeting the requirements of Section 407(d)(5) of the Act for "qualifying employer securities". All valuations of Shares, where such Shares are not readily tradable on an established securities market and where such valuations relate to activities carried on by the Plan, shall be made by one or more independent appraisers retained by the Committee, who meet the requirements, if any, of the Code and Regulations. To the extent and in the manner required by the Code and Regulations, all independent appraisers, if any, making appraisals pursuant to the foregoing sentence shall be registered with the IRS. 2.49 "Surviving Spouse" means the survivor of a Participant to whom such Participant was legally married on the date of the Participant's death. 2.50 "Suspense Subfund" means the subfund established under Section 7.3. 2.51 "Taxable Compensation" means the W-2 compensation paid to an individual for Service during any period under consideration. 2.52 "Taxable Year" means the calendar year. 2.53 "Total Break in Service" means a period of five or more consecutive Computation Periods in which a Participant incurs a Break in Service, with respect to a Participant who did not have a nonforfeitable right to any portion of his or her Profit Sharing Subaccount or ESOP Account prior to the beginning of the first such Computation Period. 2.54 "Trustee" means the Trustee selected by the Employer to hold the funds contributed by the Employer to provide benefits under the Plan or any successor or substitute. 2.55 "Trust Agreement" means the Charles Schwab Profit Sharing and Employee Stock Ownership Plan Trust Agreement, as it may from time to time be amended, and such additional and successor trust agreements as may be executed. 2.56 "Trust Fund" means the funds held by the Trustee from which payments to the Trustee are made to provide benefits under the Plan. 2.57 "Valuation Date" means the last day of each Plan Year or such interim periods as the Committee may designate from time to time. 2.58 "Vested Interest" means the portion of a Participant's Account which has become nonforfeitable pursuant to Section 10.3 below. 2.59 "Year of Eligibility Service" means a Computation Period during which an Employee completes at least 1,000 Hours of Service. 2.60 "Year of Service" means a Computation Period during which an individual completed at least 1,000 Hours of Service or satisfied any alternative requirement, as determined by the Committee from time to time in accordance with the Regulations. SECTION 3. PARTICIPATION 3.1 Commencement of Participation. (a) An Employee who is a Participant as of the date immediately preceding the Restated Effective Date shall continue to be a Participant of the Plan as of the Restated Effective Date. (b) An Employee who is not a Participant on the Restated Effective Date and who (A) is in Service on the Restated Effective Date or (B) commences Service on or after the Restated Effective Date shall be eligible to become a Participant of the Plan for purposes of: (i) Elective Contributions, Matching Contributions and Qualified Nonelective Contributions on the first Section 401(k) Entry Date coincident with or next following his or her commencement of Service; and (ii) Profit Sharing Contributions and ESOP Contributions on the first ESOP/Profit Sharing Entry Date coincident with or next following the date on which he or she completes a Year of Eligibility Service. (c) An Employee who is eligible to become a Participant, but declines to participate in the Plan, may become a Participant as of any subsequent Section 401(k) Entry Date or ESOP/Profit Sharing Entry Date. (d) An Employee who satisfies the requirements of Section 3.1(b)(ii) for participation but who terminates Service prior to becoming a Participant in the Plan and subsequently becomes an Employee again prior to incurring a Break in Service will become a Participant in the Plan for all purposes as of the first day on which such individual again becomes an Employee. 3.2 Cessation of Participation. A Participant shall cease to be a Participant upon the earliest to occur of (i) the Participant's retirement on his or her Retirement Date, (ii) the Participant's death or Disability or (iii) the Participant's termination of Service prior to his or her Retirement Date followed by a Break in Service. A Participant who, without any Break in Service, ceases to be an Employee for any reason, shall not cease to be a Participant, provided that, notwithstanding any other provision of the Plan, and except as provided in Section 4.3, no contribution shall be made for the benefit of such Participant, no contributions under the Plan shall be allocated, added or otherwise credited to the Account of such Participant, and no contributions, forfeitures or Shares released from a Suspense Subfund shall be allocated, added or otherwise credited to the Account of such Participant on or after the date on which such Participant ceases to be an Employee and before the first day of the Plan Year coincident with or preceding the date, if any, on which such Participant again resumes Service as an Employee. 3.3 Readmission After Cessation of Participation. A Participant who has incurred a Total Break in Service and subsequently returns to Service shall be treated as a new Employee for all purposes of the Plan. In all other cases, a former Participant who returns to Service following a Break in Service shall again become a Participant as of the first date of such former Participant's return to Service, except that (i) such Participant shall not be eligible to commence Elective Contributions until the first Section 401(k) Entry Date or ESOP/Profit Sharing Entry Date coincident with or next following the date the Participant returns to Service, and (ii) if such former Participant is not then an Employee, such former Participant shall again become a Participant as of the first day on which such former Participant again becomes an Employee. 3.4 Waiver of Participation. An individual who has satisfied the requirements for participation set forth in Section 3.1 may permanently waive participation in the Plan, but only if such individual is on temporary transfer of employment to a Participating Employer from an Affiliated Employer that is not a Participating Employer. SECTION 4. EMPLOYER CONTRIBUTIONS 4.1 Elective Contributions. The Employer shall, subject to the limitations of Sections 5 and 12, contribute to the Trust Fund for each Plan Year on behalf of all Participants the total amount of Elective Contributions designated to be contributed pursuant to Salary Reduction Agreements under Section 5.1. Such contributions shall be paid in cash by the Employer to the Trustee as soon as practicable, but in no event later than 90 days from the date on which such amounts otherwise would have been payable to the Participant in cash. 4.2 Employer Contributions. (a) Subject to the limitations of Section 12, the Employer shall contribute Matching Contributions to the Trust Fund on behalf of all Participants for whom Elective Contributions have been made equal to a percentage of such Elective Contributions made for each such Participant. The percentage (and, if desired, a maximum dollar amount) of Matching Contributions shall be determined from time to time by the Board of Directors and communicated to the Participants. (b) Subject to the limitations of Section 12, for any Plan Year, the Board of Directors may designate (i) a percentage of the aggregate Compensation of all Participants or a fixed dollar amount to be contributed to the Plan as Qualified Nonelective Contributions on behalf of certain Participants who are not Highly Compensated Participants and may designate (ii) a percentage of the aggregate Compensation of all Participants or a fixed dollar amount to be contributed to the Plan as Profit Sharing Contributions on behalf of all Employees who are or would be Participants but for their election not to make Elective Contributions. Provided, however, that effective as of January 1, 1995, no further Profit Sharing Contributions shall be made to the Plan. (c) Subject to the limitations of Section 12, and the provisions of any applicable loan or contribution agreement, the Employer shall contribute to the Trust Fund for each Plan Year as ESOP Contributions such sum as the Board of Directors may, in its sole discretion, determine, which sum may be zero. All or any part of the contributions made under this Section 4.2(c) may be applied to repay any outstanding Exempt Loan. The Committee may, subject to any pledge or similar agreement, direct or determine the proportions of such contributions which are applied to repay each such Exempt Loan and, with respect to any particular Exempt Loan, the proportion of such contribution to be applied to repay principal and interest on such Exempt Loan. 4.3 Allocation of Matching Contributions, Profit Sharing Contributions and ESOP Contributions. Matching Contributions shall only be allocated to those Participants employed on the last day of the Plan Year. Profit Sharing Contributions and ESOP Contributions shall only be allocated to Participants who are members of the Allocation Group for the Plan Year. For purposes of Sections 4 and 7, the term "Allocation Group" means the group consisting of (i) each Participant who completed at least One Thousand (1,000) Hours of Service during the Plan Year and is employed by the Employer as of the last day of the Plan Year, and (ii) each Participant whose employment with the Employer terminated during the Plan Year by reason of Disability, death or retirement on or after the Participant's Retirement Date. Profit Sharing Contributions and ESOP Contributions shall be allocated among the Accounts of Participants who are members of the Allocation Group for the Plan Year in the same proportion that a Participant's Compensation during the Plan Year bears to the total Compensation during the Plan Year of all Participants who are members of the Allocation Group for such Plan Year. For purposes of the preceding sentence, Compensation earned by a Participant prior to the Participant's entry into the Plan pursuant to Section 3.1(b)(ii) shall not be taken into account. 4.4 Timing of Employer Contributions. (a) Any Profit Sharing Contributions, Qualified Nonelective Contributions and ESOP Contributions shall be deemed made on account of a Taxable Year if (i) the Board of Directors determines the amount of such contribution by appropriate action and announces the amount in writing to its Employees within 30 days after the end of such Taxable Year, (ii) the Employer designates such amount in writing as payment on account of such Taxable Year or (iii) the Employer claims such amount as a deduction on its federal tax return for such Taxable Year. (b) Profit Sharing Contributions, Matching Contributions, and, subject to the provisions of any Exempt Loan, ESOP Contributions for any particular Taxable Year may be paid to the Trustee in installments, but in any event such contributions shall be paid no later than the due date for the Employer's federal income tax return for such Taxable Year. The Employer may, during any Taxable Year, make advance payments toward its contributions for such Taxable Year. Any income, earnings or appreciation earned by any amount contributed by the Employer prior to the end of the Plan Year shall be treated as part of the Profit Sharing Contributions, Matching Contributions, or ESOP Contributions, as the case may be, for such Plan Year. On or about the date of such payment the Committee shall be advised of the amount of such payment upon which its allocation pursuant to Section 4.3 is to be calculated. 4.5 Forfeitures. Forfeitures of Profit Sharing Contributions arising during the Plan Year pursuant to Section 10 shall be used to reduce the amount of Matching Contributions made for such Plan Year pursuant to Section 4.2(a). Forfeitures of Shares attributable to ESOP Contributions (or ESOP Contributions) arising during the Plan Year pursuant to Section 10 shall be reallocated as ESOP Contributions on the last day of the Plan Year in which such forfeiture occurs to all Participants entitled to receive Shares attributable to ESOP Contributions (or ESOP Contributions), in the same proportion as contributions are allocated pursuant to Sections 4.3 and 7.2. Provided, in either case, that forfeitures shall first be used to fund adjustments to Participants' Accounts required to correct operational errors, to the extent directed by the Committee, or to fund any amounts to be recredited to a Participant's Account pursuant to Section 10.5. 4.6 Contribution Percentage Test. (a) Participants' Contribution Percentages must satisfy at least one of the following tests: (1) The Contribution Percentage for the Highly Compensated Participants shall not exceed the Contribution Percentage of all other Participants multiplied by 1.25; or (2) (a) The excess of the Contribution Percentage for the Highly Compensated Participants over the Contribution Percentage of all other Participants shall not be more than two percentage points and (b) the Contribution Percentage for Highly Compensated Participants shall not be more than the Contribution Percentage for all other Participants multiplied by 2. (b) All Matching Contributions and Elective Contributions that are made under two or more plans that are aggregated for purposes of Sections 401(a)(4) and 410(b) of the Code (other than Section 410(b)(2)(a)(ii)) are to be treated as made under a single plan; and if two or more plans are permissively aggregated such plans shall satisfy Sections 401(a)(4) and 410(b) as though they were a single plan in accordance with Section 401(m) of the Code and Section 1.401(m)-1 of the Regulations. For purposes of this Section 4.6, Matching Contributions are taken into account for a Plan Year only if (i) made on account of the Participant's Elective Contributions for the Plan Year, (ii) allocated to the Participant's Account during the Plan Year and (iii) paid to the Trust Fund prior to the end of the twelfth month following the close of the Plan Year. For purposes of determining whether the test of this Section 4.6 and Section 5.3 of this Plan are satisfied, the Actual Deferral Percentage and the Contribution Percentage shall be determined with reference to Section 1.401(m)-2(b) of the Regulations. Any excess over the amount permitted by Section 1.401(m)-2(b) of the Regulations shall be reduced by treating such excess as an excess Elective Contribution and by refunding excess Elective Contributions in the manner set forth in Section 5.5 hereof, but only for all those Highly Compensated Participants who are eligible for contributions pursuant to Section 4 and Section 5 hereof. (c) In applying the tests set forth in subsections (a) and (b) of this Section 4.6, the following rules shall apply. (1) In the case of an Employee who receives no Matching Contributions, the Matching Contributions that are to be included in determining the Participant's Contribution Percentage are zero; (2) In the case of a Highly Compensated Participant who is either a five percent (5%) owner or one of the ten most Highly Compensated Participants and is thereby subject to the family aggregation rules of Section 414(q)(6) of the Code, the Contribution Percentage for the "family" (which is treated as one Highly Compensated Participant) is the Contribution Percentage determined by combining the contributions and Compensation of all eligible family members. Except to the extent taken into account in the preceding sentence, the contributions and Compensation of all family members are disregarded in determining the Contribution Percentages for the Highly Compensated Participants and non-highly compensated Participants. For purposes of this Section 4.6, the term "family" means the spouse, lineal ascendants and descendants (and the spouses of such lineal ascendants and descendants). (3) The availability of Matching Contributions shall not discriminate in favor of Highly Compensated Participants. (4) In the case of a Highly Compensated Participant whose Contribution Percentage is determined under the family aggregation rules, the determination of the amount of excess aggregate contributions shall be reduced in accordance with the "leveling" method described in Section 1.401(m)-1(e)(2) of the Regulations and the excess aggregate contributions shall be allocated among the family members in proportion to the contributions of each family member. (5) The distribution of excess aggregate contributions will include the income allocable thereto and shall be made on the basis of the respective portions of such amounts attributable to each Highly Compensated Participant. The income allocable to the excess aggregate contributions includes income for the Plan Year for which the excess aggregate contributions were made in accordance with Section 1.401(m) - 1(e)(3)(ii) of the Regulations. (6) A Participant shall include any Employee who is directly or indirectly eligible to receive an allocation of Matching Contributions and includes (i) an Employee who would be a Participant but for the failure to make required contributions and (ii) a Participant whose right to receive Matching Contributions has been suspended because of an election (other than certain one-time elections) not to participate. 4.7 Distribution of Excess Aggregate Contributions. (a) The Committee shall determine as of the end of the Plan Year, and at such other time or times in its discretion, whether one of the Contribution Percentages of Section 4.6 is satisfied for such Plan Year. If neither of the tests set forth in Section 4.6 is satisfied, the Committee shall distribute the excess aggregate contributions in the manner described in this Section 4.7. For purposes of this Section 4.7, "excess aggregate contributions" means, with respect to any Plan Year and with respect to any Participant, the excess of the aggregate amount of (i) Matching Contributions (and any earnings and losses allocable thereto prior to distribution) and (ii) the Elective Contributions (if the Regulations permit and the Committee elects to take into account Elective Contributions when calculating the Participant's Contribution Percentage) of Highly Compensated Participants for such Plan Year, over the maximum amount of such contributions that could be made on behalf of Participants without violating the requirements of Section 4.6. The amount of each Highly Compensated Participant's excess aggregate contributions shall be determined by reducing the Matching Contributions of all Highly Compensated Participants whose Contribution Percentage as adjusted by this Section 4.7 are at the highest percentage rate for the Plan Year on a pro rata basis by one hundredth of one percent (0.01%). The Committee shall continue to utilize this procedure until one of the tests of Section 4.6 is satisfied. (b) If the Committee is required to distribute excess aggregate contributions for any Highly Compensated Participant for a Plan Year in order to satisfy the requirements of Section 4.6, then the Committee shall distribute such excess aggregate contributions with respect to such Highly Compensated Participants to the extent practicable before April 15th of the Plan Year next following the Plan Year for which such excess aggregate contributions were made, but in no event later than the end of the Plan Year following such Plan Year. For each of such Participants, the amounts so distributed shall be made in the following order of priority: (i) by distributing Matching Contributions and earnings thereon, to the extent necessary; and (ii) by distributing Elective Contributions (to the extent such amounts are included in the Contribution Percentage), and earnings thereon. All such distributions shall be made to Highly Compensated Participants on the basis of the respective portions of such amounts attributable to each such Highly Compensated Participant. No spousal consent shall be required of any married Participant who receives a refund of excess aggregate contributions. 4.8 Aggregate Limit for Contribution Percentage and Actual Deferral Percentage. (a) The sum of the Contribution Percentage and the Actual Deferral Percentage for Highly Compensated Participants for the Plan Year shall not exceed the "aggregate limit" defined in this Section 4.8. (b) The term "aggregate limit" means the greater of (1) or (2) below: (1) The sum of (a) the greater of the Actual Deferral Percentage for all Participants other than the Highly Compensated Participants or the Contribution Percentage for all Participants other than the Highly Compensated Participants, for the Plan Year multiplied by 1.25 and (b) the lesser of such Actual Deferral Percentage or Contribution Percentage plus 2, but not greater than 2 multiplied by the lesser of such Actual Deferral Percentage or Contribution Percentage. (2) The sum of (a) the lesser of the Actual Deferral Percentage for all Participants other than the Highly Compensated Participants or the Contribution Percentage for all Participants other than the Highly Compensated Participants, for the Plan Year multiplied by 1.25 and (b) the greater of such Actual Deferral Percentage or Contribution percentage plus 2, but not greater than 2 multiplied by the greater of such Actual Deferral Percentage or Contribution Percentage. (c) If the aggregate limit is exceeded, the Committee shall determine whether to: (i) make Qualified Nonelective Contributions to permit the satisfaction of the test set forth in subsection (a) hereof; (ii) reduce the Contribution Percentage of the Highly Compensated Participants as set forth in Section 4.7; or (iii) reduce the Actual Deferral Percentage of the Highly Compensated Participants as set forth in Section 5.5. SECTION 5. SALARY REDUCTION AGREEMENTS AND ROLLOVER CONTRIBUTIONS 5.1 Salary Reduction Agreements. (a) A Participant may elect to make Elective Contributions in any Plan Year by entering into a written Salary Reduction Agreement with the Employer. Each Salary Reduction Agreement shall provide that a portion of the Participant's Compensation shall be paid through payroll deduction to the Trust Fund as an Elective Contribution pursuant to Section 4.1 rather than paid currently to the Participant. The Salary Reduction Agreement shall provide for Elective Contributions equal to any whole percentage between one percent (1%) and fifteen percent (15%) of a Participant's Compensation in any payroll period, not to exceed the limitation set forth in Section 402(g) of the Code (adjusted automatically for increases in accordance with the Regulations). Notwithstanding the foregoing provisions of this Section 5.1, the Committee may, but need not, adopt a procedure to enable Participants to make lump sum Elective Contributions under the Plan through payroll deductions. No Salary Reduction Agreement shall be effective unless the Participant has filed a written investment direction pursuant to Section 8.3. (b) A Salary Reduction Agreement will be taken into account for any Plan Year only if it relates to Compensation that would have been received by the Participant in the Plan Year (but for the deferral election). (c) In the event that the aggregate amount of Elective Contributions by a Participant exceeds the limitation described in subsection (a) of this Section 5.1, the amount of such excess, increased by any income and decreased by any losses attributable thereto, shall be refunded to the Participant no later than the April 15th of the calendar year following the calendar year for which the Elective Contributions were made. If a Participant also participates, in any calendar year, in any other plans subject to the limitations set forth in Section 402(g) of the Code and has made excess deferrals under this Plan when combined with the other plans subject to such limits, to the extent the Participant designates, in writing submitted to the Committee no later than the March 1 of the calendar year next following the calendar year for which the Elective Contributions were made, any Elective Contributions under this Plan as excess deferrals, the amount of such designated excess, increased by any income and decreased by any losses attributable thereto, shall be refunded to the Participant no later than the April 15 of the calendar year next following the calendar year for which the Elective Contributions were made. 5.2 Change or Suspension of Salary Reduction Agreements. Subject to Section 5.1, a Participant may enter into or change his or her Salary Reduction Agreement on each Section 401(k) Entry Date, effective as of the first day of the Section 401(k) Entry Date, in accordance with rules determined by the Committee. In addition, a Participant may also suspend his or her Salary Reduction Agreement at any time, in accordance with rules determined by the Committee. A Participant who suspends his or her Salary Reduction Agreement in accordance with this Section 5.2 may enter into a new Salary Reduction Agreement effective as of the next succeeding Section 401(k) Plan Entry Date. A Participant's most recent Salary Reduction Agreement shall continue unchanged from year to year unless the Participant notifies the Committee in writing of a change in such Salary Reduction Agreement in accordance with the rules determined by the Committee. 5.3 Actual Deferral Percentage Test. (a) Participants' Elective Contributions must satisfy at least one of the following tests: (1) The Actual Deferral Percentage for the Highly Compensated Participants shall not exceed the Actual Deferral Percentage of all other Participants multiplied by 1.25; or (2) (A) The excess of the Actual Deferral Percentage for the Highly Compensated Participants over the Actual Deferral Percentage of all other Participants shall not be more than two percentage points, and (B) the Actual Deferral Percentage for the Highly Compensated Participants shall not be more than the Actual Deferral Percentage for all other Participants multiplied by 2. (b) All Elective Contributions that are made under two or more plans that are aggregated for purposes of Sections 401(a)(4) and 410(b) of the Code (other than Section 410(b)(2)(A)(ii)) are to be treated as made under a single plan; and if two or more plans are permissively aggregated, such plans shall satisfy Sections 401(a)(4) and 410(b) as though they were a single plan in accordance with Section 401(k) and Section 1.401(k)-1 of the Regulations. (c) In applying the tests set forth in subsections (a) and (b) of this Section 5.3, the following rules shall apply: (1) In the case of a Participant who makes no Elective Contributions, the Elective Contributions that are to be included in determining the Participant's Actual Deferral Percentage are zero; (2) In the case of a Highly Compensated Participant who is either a five percent (5%) owner or one of the ten most Highly Compensated Participants and is thereby subject to the family aggregation rules of Section 414(q)(6) of the Code, the Actual Deferral Percentage for the "family" (which is treated as one Highly Compensated Participant) is the greater of (1) the Actual Deferral Percentage determined by combining the contributions and Compensation of all eligible family members who are highly compensated without regard to family aggregation, and (2) the Actual Deferral Percentage determined by combining the contributions and Compensation of all eligible family members. Except to the extent taken into account in the preceding sentence, the contributions and Compensation of all family members are disregarded in determining the Actual Deferral Percentages for the Highly Compensated Participants and non-highly compensated Participants. For purposes of this Section 5.3, the term "family" means the spouse, lineal ascendants and descendants (and the spouses of such lineal ascendants and descendants). (3) In the case of a Highly Compensated Participant whose Actual Deferral Percentage is determined under the family aggregation rules, the determination of the amount of excess contributions shall be reduced in accordance with the "leveling" method described in Section 1.401(k)-1(f)(2) of the Regulations and the excess aggregate contributions shall be allocated among the family members in proportion to the contributions of each family member. (4) The distribution of excess contributions will include the income attributable thereto and shall be made on the basis of the respective portions of such amounts attributable to each Highly Compensated Participant. The income allocable to the excess contributions includes income for the Plan Year for which the excess contributions were made in accordance with 1.401(k) - 1(f)(4)(ii) of the Regulations. 5.4 Amendment or Revocation of Salary Reduction Agreement by Committee. The Committee shall determine as of the end of the Plan Year, and at such other time or times in its discretion, whether one of the Actual Deferral Percentage tests of Section 5.3 will be satisfied for such Plan Year. In the event that neither of such Actual Deferral Percentage Tests is satisfied, the Committee may amend or revoke the Salary Reduction Agreement of any Participant at any time if it determines that such an amendment or revocation is necessary to ensure that at least one of the Actual Deferral Percentage tests of Section 5.3 will be satisfied for any Plan Year. The determination of whether it is necessary to amend or revoke any Salary Reduction Agreement shall be made pursuant to Section 5.3 and the procedure for such amendment or revocation shall be determined pursuant to Section 5.5(a). 5.5 Distribution of Excess Contributions. (a) If neither of the tests set forth in Section 5.3 are satisfied, the Committee shall in its discretion, to the extent permissible under the Code and the Regulations, refund the excess contributions in the manner described in Section 5.5(b). For purposes of this Section 5.5, "excess contributions" means, with respect to any Plan Year, the excess of the aggregate amount of Elective Contributions (and any earnings and losses allocable thereto prior to distribution) made by Highly Compensated Participants for such Plan Year, over the maximum amount of such Elective Contributions that could be made by such Highly Compensated Participants without violating the requirements of Section 5.3. (b) If required in order to comply with the provisions of Subsection 5.3 and the Code, the Committee shall refund excess contributions for a Plan Year. The distribution of such excess contributions shall be made to Highly Compensated Participants, to the extent practicable, before the March 15th of the Plan Year next following the Plan Year for which such excess contributions were made, but in no event later than the end of the Plan Year next following such Plan Year. Any such distribution shall be made to each Highly Compensated Participant by reducing the Elective Contributions of all Highly Compensated Participants whose Elective Contributions, as amended by this Section 5.5, are at the highest percentage rate for the Plan Year on a pro rata basis by one hundredth of one percent (0.01%). The Committee shall continue to utilize this procedure until one of the tests of Section 5.3 is satisfied. Matching Contributions attributable to Elective Contributions returned to a Participant shall be distributed as provided in Section 4.6. 5.6 Rollover Contributions. (a) A Participant may make a Rollover Contribution to the Plan in accordance with rules established by the Committee uniformly applied consisting of an eligible rollover distribution, as defined in Section 11.8(b), from a plan qualified under Section 401(a) of the Code or an individual retirement account qualified under Section 408(a) of the Code (no part of which is attributable to any source other than an eligible rollover distribution from a qualified plan under Section 401(a) of the Code); provided such eligible rollover distribution is in cash and contributed to the Plan on or before the 60th day after the day in which such Participant received such eligible rollover distribution. If a Participant elects to make a Rollover Contribution, the Committee may require such evidence, assurances, opinions and certifications, including a statement from the previous plan that such plan was a qualified plan, that the Committee may deem necessary to establish to its satisfaction that the amounts to be contributed qualify as an eligible rollover distribution and will not affect the qualification of the Plan or the tax-exempt status of the Trust under Sections 401(a) and 501(a) of the Code, respectively. Except as otherwise permitted by Section 5.7, in no event shall any assets be transferred to this Plan from any profit sharing, pension or retirement plan that would cause this Plan to become a "transferee" plan (within the meaning set forth in Section 401(a)(11)(B) of the Code). (b) Any Rollover Contribution shall be allocated to the appropriate Participant's Rollover Contribution Subaccount which shall be established and separately accounted for. A Participant shall have at all times a nonforfeitable right in the amount credited to his or her Rollover Contribution Subaccount. (c) Each request by a Participant to make a Rollover Contribution shall be subject to review by the Committee which shall make a case by case determination that each Rollover Contribution meets the requirements set forth in Section 5.6(a), and such other requirements or conditions as the Committee may, from time to time and in its sole discretion, impose; provided, however, that any determination made by the Committee pursuant to this Section 5.6 shall not have the effect of discriminating in favor of Participants who are officers, shareholders or who are Highly Compensated Participants. 5.7 Trustee-to-Trustee Transfer of Assets. Notwithstanding anything in Section 5.6 to the contrary, in the event of an acquisition by the Employer or the Plan Sponsor of a company which maintains a plan and trust which are qualified under Sections 401(a) and 501(a) of the Code, respectively, the Board of Directors may (but shall not be required to) authorize a "trustee-to-trustee" transfer of assets from such qualified plan into the Plan and Trust Fund. The Trustee may require such evidence, assurances, opinions and certifications, including a statement from the acquired company's plan that such plan and trust are qualified under Sections 401(a) and 501(a) of the Code, which the Trustee may deem necessary to establish to its satisfaction that the amounts to be transferred will not affect the qualification of the Plan or the tax-exempt status of the Trust under Sections 401(a) and 501(a) of the Code, respectively. SECTION 6. ALLOCATION OF CONTRIBUTIONS 6.1 Establishment of Cash Contribution Account. The Committee shall establish and maintain or cause to be established and maintained with respect to each Participant a Cash Contribution Account showing his or her interest under the Plan and in the Trust Fund and all relevant data pertaining thereto. Each Participant shall be furnished with a written statement of his or her Cash Contribution Account at least once annually and upon any distribution to him or her. In maintaining the Cash Contribution Accounts under the Plan, the Committee can conclusively rely on the valuations of the Trust Fund in accordance with the Plan. The establishment and maintenance of, or allocations and credits to, the Cash Contribution Account of any Participant shall not vest in any Participant any right, title or interest in and to any Plan assets or benefits, except at the time or times and upon the terms and conditions and to the extent expressly set forth in the Plan and in accordance with the terms of the Trust Fund. 6.2 Establishment of Subaccounts. Each Participant's Cash Contribution Account shall contain each of the following applicable subaccounts therein: (a) All Elective Contributions on behalf of a Participant under Section 4.1 and Qualified Nonelective Contributions on behalf of a Participant under Section 4.2(b)(i) shall be credited to the Participant's Elective Contribution Subaccount. (b) All Matching Contributions on behalf of a Participant under Section 4.2(a) shall be allocated and credited to the Participant's Matching Contribution Subaccount. (c) All Profit Sharing Contributions on behalf of a Participant under Section 4.2(b)(ii) shall be allocated and credited to the Participant's Profit Sharing Subaccount. (d) All Rollover Contributions on behalf of a Participant under Section 5.6 shall be allocated and credited to the Participant's Rollover Contribution Subaccount. SECTION 7. SPECIAL ESOP PROVISIONS 7.1 Investment of ESOP Accounts. The ESOP Accounts of all Participants shall be invested exclusively in Shares, except for cash or cash equivalent investments held (a) for the limited purpose of making Plan distributions to Participants and Beneficiaries, (b) pending the investment by the Purchasing Agent of contributions or other cash receipts in Shares, (c) pending use to repay an Exempt Loan, (d) for purposes of paying, under the terms described in the Plan or Trust Agreement, fees and expenses incurred with respect to the Plan or Trust and not paid for by the Participating Employers or (e) in the form of de minimis cash balances. Neither any Participating Employer nor the Purchasing Agent, the Committee or the Trustee shall have any responsibility or duty to time any transaction involving Shares in order to anticipate market conditions or changes in stock value, nor shall any such person have any responsibility or duty to sell Shares held in the ESOP Accounts (or otherwise to provide investment management for Shares held in the ESOP Accounts) in order to maximize return or minimize loss. Participating Employer contributions made in cash, and other cash received by the Trustee, may be used by the Purchasing Agent to acquire Shares from shareholders of the Employer or directly from the Employer. 7.2 Allocation to ESOP Accounts. (a) Subject to the provisions of Section 4, the ESOP Account maintained for each Participant will be credited as of the last day of each Plan Year with the Participant's allocable share of: (i) Shares purchased by the Purchasing Agent using cash contributed by or on behalf of the Participating Employer employing such Participant (or contributed directly to the Trust Fund) and (ii) Shares released from the Suspense Subfund pursuant to Section 7.3 and allocable to the contribution made by or on behalf of such Participating Employer pursuant to Section 7.4. (b) Shares attributable to ESOP Contributions shall be allocated among the Accounts of Participants who are members of the Allocation Group for the Plan Year in the same proportion that a Participant's Compensation during the Plan Year bears to the total Compensation during the Plan Year of all Participants who are members of the Allocation Group for such Plan Year. For purposes of the preceding sentence, Compensation earned by a Participant prior to the Participant's entry into the Plan pursuant to Section 3.1(b)(ii) shall not be taken into account. (c) Shares contributed directly to the Trust Fund for a Plan Year shall be allocated under Section 7.2(a)(i) in the same proportion as Shares purchased by the Trust Fund and allocated under Section 7.2(b). 7.3 Suspense Subfund for ESOP Accounts. Shares acquired by the Participants' ESOP Accounts through an Exempt Loan shall be added to and maintained in the Suspense Subfund and shall thereafter be released from the Suspense Subfund and allocated to Participants' ESOP Accounts as provided in Sections 7.3 and 7.4. Shares acquired for the Trust Fund with the proceeds of an Exempt Loan shall be released from the Suspense Subfund as the Exempt Loan is repaid, in accordance with the provisions of this Section 7.3. (a) For each Plan Year until the Exempt Loan is fully repaid, the number of Shares released from the Suspense Subfund shall equal the number of unreleased Shares immediately before such release for the current Plan Year multiplied by the "Release Fraction." As used herein, the term "Release Fraction" shall mean a fraction, the numerator of which is the amount of principal and interest paid on the Exempt Loan for such current Plan Year and the denominator of which is the sum of the numerator plus the principal and interest to be paid on such Exempt Loan for all future years during the term of such Exempt Loan (determined without reference to any possible extensions or renewals thereof). For purposes of computing the denominator of the Release Fraction, if the interest rate on the Exempt Loan is variable, the interest to be paid in subsequent Plan Years shall be calculated by assuming that the interest rate in effect as of the end of the applicable Plan Year will be the interest rate in effect for the remainder of the term of the Exempt Loan. Notwithstanding the foregoing, in the event such Exempt Loan shall be repaid with the proceeds of a subsequent Exempt Loan (the "Substitute Loan"), such repayment shall not operate to release all such Shares in the Suspense Subfund, but, rather, such release shall be effected pursuant to the foregoing provisions of this Section 7.3(a) on the basis of payments of principal and interest on such Substitute Loan. (b) If required by any pledge or similar agreement, or if permitted by such pledge or agreement and required by the Committee pursuant to a one-time, irrevocable designation (which shall be made, if at all, in connection with the making of an Exempt Loan) by the Committee, then, in lieu of applying the provisions of Section 7.3(a) hereof with respect to an Exempt Loan, Shares shall be released from the Suspense Subfund as the principal amount of such Exempt Loan is repaid (without regard to interest payments), provided the following three conditions are satisfied: (i) The Exempt Loan shall provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for ten years; (ii) The interest portion of any payment shall be disregarded only to the extent it would be treated as interest under standard loan amortization tables; and (iii) If the Exempt Loan is renewed, extended or refinanced, the sum of the expired duration of the Exempt Loan and the renewal, extension or new Exempt Loan period shall not exceed ten years. (c) If at any time there is more than one Exempt Loan outstanding, then separate accounts may be established under the Suspense Subfund for each such Exempt Loan. Each Exempt Loan for which a separate account is maintained may be treated separately for purposes of the provisions governing the release of Shares from the Suspense Subfund under this Section 7.3 (including for purposes of determining whether Section 7.3(a) or Section 7.3(b) governs the release of Shares from any particular Suspense Subfund) and for purposes of the provisions governing the application of Participating Employer contributions to repay an Exempt Loan under Section 4.2. (d) All Shares released from the Suspense Subfund during any Plan Year shall be allocated among Participants as prescribed by Section 7.4. 7.4 Disposition of Shares Released from Suspense Subfund. (a) Shares released from the Suspense Subfund for a Plan Year in accordance with Section 7.3 shall be held in the Trust Fund on an unallocated basis until allocated by the Committee as of last day of the Plan Year. Shares released from the Suspense Subfund on account of a payment for a Plan Year of principal or interest on an Exempt Loan, to the extent payment is made with contributions for such Plan Year, shall be allocated under Section 7.2(a)(ii) in the same proportion as Shares purchased with contributions under Section 7.2(b). (b) (i) Shares released from the Suspense Subfund on account of the payment for a Plan Year of principal or interest on an Exempt Loan to the extent such payment is made with dividends paid on Shares allocated to ESOP Accounts, shall be allocated in the same proportion as dividends used to pay principal or interest on such Exempt Loan would have been allocated under Section 7.9(b) had such dividends not been so used; and (ii) Subject to Section 4.2, Shares released from the Suspense Subfund on account of the payment of principal or interest on an Exempt Loan, to the extent such payment is made with dividends on Shares not allocated to Accounts, shall be allocated to those ESOP Accounts and in the same proportion as Shares released pursuant to Section 7.4(b)(i); provided that Shares so released shall be otherwise allocated if necessary to satisfy the requirements of the Code (other than Section 404(k)) and any Regulations thereunder. (c) All Shares in the Trust Fund, other than the Shares held in the Suspense Subfund as of the last day of any Plan Year, must be allocated to ESOP Accounts as of the last day of any Plan Year. 7.5 Limitations on Allocations to ESOP Accounts. Notwithstanding the foregoing provisions of this Section 7: (a) If more than one-third of all ESOP Contributions for a Plan Year which are deductible only under Section 404(a)(9) of the Code would be allocated, in the aggregate, to Participants described in Section 414(q) of the Code, then the Committee may reduce such allocations pro rata in an amount sufficient to ensure that such ESOP Contributions will be deductible with respect to such Plan Year; and (b) Any contributions which are prevented from being allocated due to the restriction contained in Section 7.5(a) shall be allocated as of the last day of the Plan Year pursuant to Sections 7.2 and 7.4 as though those Participants described in Section 414(q) of the Code did not participate in the Plan. 7.6 Acquisition of Shares. (a) Notwithstanding the foregoing provisions of this Section 7, in the event that Shares are acquired in a transaction to which Section 1042 of the Code applies, then, in accordance with the Regulations, such Shares shall not be allocated, directly or indirectly, to prohibited individuals as defined in Section 409(n)(1) of the Code for the duration of the nonallocation period (as defined in Section 409(n)(3)(C) of the Code). (b) If Shares are prevented from being allocated due to the prohibition contained in Section 7.6(a), the allocation of Shares attributable to ESOP Contributions (or ESOP Contributions) otherwise provided under Section 7.2 shall be adjusted to reflect such result. 7.7 Effect of Change in Plan Sponsor's Capitalization. Any Shares received by the Trustee as a result of a stock split, dividend, conversion, or as a result of a reorganization or other recapitalization of the Plan Sponsor shall be allocated as of the day on which the Shares are received by the Trustee in the same manner as the Shares to which they are attributable are then allocated. 7.8 Trustee and Committee Discretion to Engage in Transactions in Shares. Neither the Purchasing Agent, the Trustee nor the Committee shall be required to engage in any transaction, including, without limitation, directing the purchase or sale of Shares, which it determines in its sole discretion may subject itself, its Participants, the Plan, any Participating Employer, or any Participant to liability under federal or other state laws. 7.9 Valuation of ESOP Accounts. (a) Subject to the requirements of Section 7.9(b), the fair market value of the assets of the ESOP Accounts shall be determined as of each Valuation Date, in accordance with generally accepted valuation methods and practices including, but not limited to, in the case of Shares, the use of one or more independent appraisers. (b) The value of a Participant's ESOP Account as of any Valuation Date shall equal the sum of: (i) The aggregate value (as determined under Section 7.9(a)) of all Shares and dividends on Shares previously allocated to such Participant's ESOP Account as of such Valuation Date; and (ii) Subject to Section 7.9(c), the aggregate value (as determined under Section 7.10(a)) of dividends, if any, received during the Plan Year on Shares allocated to such Participant's ESOP Account. (iii) Such Participant's allocable portion (determined in accordance with the rules set forth in Section 7.4 for determining Participant's allocable portion of Shares released from the Suspense Subfund) of the earnings, if any, on all amounts contributed to the Trust Fund for purposes other than the repayment of an Exempt Loan. (c) Except as provided in Section 7.7, dividends payable, if any, with respect to Shares held by the Participant's ESOP Account will be, in the discretion of the Committee and in conformity with the terms of the Shares on which such dividends are paid, (i) used for the purpose of repaying one or more Exempt Loans, (ii) distributed from the Trust Fund to Participants or their Beneficiaries not later than 90 days after the close of the Plan Year in which they are paid to the Trust Fund, (iii) paid directly to such Participants or their Beneficiaries, (iv) retained in the Trust Fund and allocated pursuant to Section 7.9(b), or (v) paid or utilized in a combination of any or all of the foregoing four options. (d) The Committee shall establish accounting procedures for the purpose of making the allocations, valuations and adjustments to Participant's ESOP Accounts in accordance with the provisions of the Plan. From time to time, the Committee may modify its accounting procedures for the purpose of achieving equitable and nondiscriminatory allocations among the ESOP Accounts of Participants in accordance with the provisions of the Plan. 7.10 Role of Purchasing Agent. (a) All purchases of Shares made by the Trust Fund shall be made by the Purchasing Agent. The Trustee shall forward to the Purchasing Agent all amounts contributed to the employee stock ownership plan, and all amounts to be invested in Shares pursuant to participant investment directions given pursuant to Sections 8.3, 8.4 and 8.5. Amounts to be invested in Shares shall be invested in Shares in the amount, in the manner and at the price determined by the Purchasing Agent in its sole discretion, provided such price shall be the fair market value of such Shares at the time of purchase. The Purchasing Agent shall in its sole discretion select the broker-dealer through which the purchase of such Shares shall be executed. The Purchasing Agent shall also invest any cash dividends received on any Shares which are allocated to Participants' Accounts and held as part of the Plan as provided in Section 5.05(c) of the Trust Agreement. (b) The Purchasing Agent shall sell Shares only at the direction of the Trustee, which shall issue such instructions only at the direction of the Committee; provided that such Committee direction shall not be required for any sales of Shares required pursuant to the participant investment directions given pursuant to Sections 8.3, 8.4 or 8.5, or pursuant to the provisions of Section 13.5 or 13.6. SECTION 8. INVESTMENT OF CONTRIBUTIONS, VALUATIONS AND PARTICIPANTS' CASH CONTRIBUTION ACCOUNTS 8.1 Delivery of Contributions to Trust Fund. All monies, securities or other property contributed to Participants' Cash Contribution Accounts shall be delivered to the Trustee under the Trust Fund, to be managed, invested, reinvested and distributed in accordance with the Plan and the Trust Fund. 8.2 Participants' Right to Select Investments. Each Participant shall have the right to invest his or her Cash Contribution Account among one or more investment funds selected by the Company, which may include a fund established for investment in Shares. 8.3 Participant Investment Election. As of any date permitted by the Committee, a Participant may, in accordance with the rules of the Committee uniformly applied, specify the percentage (in minimum multiples as may be determined from time to time by the Committee) of contributions which are made to the Participant's Cash Contribution Account that shall be invested in investment funds selected by the Committee. An investment election may be made separately with respect to (i) the aggregate of the Participant's Elective Contribution Subaccount, Matching Contribution Subaccount, and Rollover Contribution Subaccount and (ii) the Participant's Profit Sharing Subaccount. 8.4 Change in Investment Election for Future Contributions. Any investment direction specified by a Participant shall be deemed to be a continuing direction until changed. A Participant may change an investment direction as to future contributions made by such Participant or on his or her behalf to the subaccounts of his or her Cash Contribution Account as of any day permitted by the Committee in accordance with the rules of the Committee uniformly applied. 8.5 Change in Investment Election for Prior Contributions. As of any date permitted by the Committee, a Participant may change the percentages (in minimum multiples as may be determined from time to time by the Committee) in which the investment of the portion of his or her Cash Contribution Account attributable to prior contributions shall be allocated among the funds maintained by the Trustee. Such changes of investment allocation may be made separately with respect to (i) the aggregate of the Participant's Elective Contribution Subaccount, Matching Contribution Subaccount, and Rollover Contribution Subaccount, and (ii) the Participant's Profit Sharing Subaccount. 8.6 Valuation of Cash Contribution Accounts. (a) As of each Valuation Date, Participants' Cash Contribution Accounts shall be valued pursuant to the terms of the Plan. Such valuation shall be conclusive and binding upon all persons having an interest in the Trust Fund. (b) The Committee shall adjust the value of each Elective Contribution Subaccount, Matching Contribution Subaccount, Profit Sharing Subaccount, or Rollover Contribution Subaccount, as the case may be, maintained under Participants' Cash Contribution Accounts as of each Valuation Date to reflect the effect of income received and accrued, realized and unrealized profits and losses, and all other transactions of the preceding period. Such adjustments shall be made with respect to the period since the next preceding Valuation Date by (i) deducting from each such Subaccount the total of all payments made from such Subaccount during such period, (ii) adding to or deducting from, as the case may be, each such Subaccount such proportion of each item of income, profit or loss as the amount in such Subaccount as of the next preceding Valuation Date bears to the total of the amounts in all of such Participants' Elective Contribution Subaccount, Matching Contribution Subaccount, Profit Sharing Subaccount, or Rollover Contribution Subaccount, as the case may be, as of the preceding Valuation Date and (iii) adding contributions to each such Elective Contribution Subaccount, Matching Contribution Subaccount, Profit Sharing Subaccount, or Rollover Contribution Subaccount, as the case may be, pursuant to Sections 4 and 5 of the Plan. In making such allocations, the Committee can conclusively rely on the valuations of the Subaccounts by the Trustee in accordance with the Plan and the Trust. SECTION 9. RETIREMENT DATES 9.1 Normal Retirement Date. The Normal Retirement Date of a Participant shall be his or her 65th birthday. Upon attainment of his or her Normal Retirement Date, a Participant shall have a nonforfeitable right to 100% of his or her Account. 9.2 Deferred Retirement Date. A Participant who remains in Service after his or her Normal Retirement Date may retire on a Deferred Retirement Date which shall be the first day of the month coincident with or next following his or her termination of Service or as specified in a written application to the Committee. SECTION 10. ELIGIBILITY FOR PAYMENT OF ACCOUNTS AND VESTED INTERESTS 10.1 Participants' Right to Account Upon Termination Due to Retirement, Death or Disability. (a) A Participant shall have a nonforfeitable right to his or her Account upon the occurrence of any of the following events while employed by the Employer: (i) attainment of his or her Retirement Date; (ii) his or her death; or (iii) his or her Disability. (b) Upon the termination of Service of any Participant on or after his or her Retirement Date or by reason of his or her death or Disability ("Terminated Participant"), the Terminated Participant (or, in the event of the Participant's death, his or her Beneficiary) shall be entitled to an amount equal to the Terminated Participant's Account, including any subsequent contribution allocated to the Terminated Participant's Account pursuant to Sections 6 or 7 with respect to the Plan Year in which the Participant's Service is terminated. The Participant's Account shall be distributable, in accordance with the methods and rules of distribution described in Section 11, as soon as practicable following the Participant's termination of Service. The value of the Participant's Account shall be determined as of the Valuation Date coincident with or immediately preceding the date of distribution of the Participant's Account. 10.2 Participants' Right to Account Upon Other Termination of Service. Upon the termination of Service of any Participant prior to his or her Retirement Date for any reason other than death or Disability, the Terminated Participant shall be entitled to receive an amount equal to the sum of (i) 100% of the Participant's Elective Contribution Subaccount, Matching Contribution Subaccount, and Rollover Contribution Subaccount and (ii) the Participant's Vested Interest in his or her Profit Sharing Subaccount and ESOP Account, including the Participant's Vested Interest in any subsequent contribution allocated to the Participant's Account pursuant to Sections 6 or 7 with respect to the Plan Year in which the Participant's Service terminated. The Participant's Account shall be distributable, in accordance with the methods and rules of distribution described in Section 11, as soon as practicable following the Valuation Date immediately following the Participant's termination of Service. The value of the Participant's Account shall be determined as of the Valuation Date coincident with or immediately preceding the date of distribution of the Participant's Account. If such Terminated Participant's Vested Interest is less than 100 percent, the non-vested balance of such Participant's Profit Sharing Subaccount and ESOP Account shall be forfeited and reallocated pursuant to Section 4.5 as of the last day of the earlier of (i) the Plan Year in which the Participant's Account is distributed, or (ii) the Plan Year in which the Participant incurs a Total Break in Service. 10.3 Vesting Schedule for Determining Vested Interests. For all purposes of this Plan, a Participant's Vested Interest in his or her Profit Sharing Subaccount and ESOP Account shall consist of (i) the Participant's percentage of his or her Profit Sharing Subaccount and (ii) the percentage of the Participant's ESOP Account, both as determined from the following vesting schedule on the basis of the number of Years of Service which the Participant has completed as of the date of the Participant's termination of Service. VESTING SCHEDULE Years of Service Percentage ---------------- ---------- Less than three years.................................... 0% Three years but less than four years..................... 20% Four years but less than five years...................... 40% Five years but less than six years....................... 60% Six years but less than seven years...................... 80% Seven years or more ..................................... 100% 10.4 Breaks in Service. If a Participant's Service is terminated prior to his or her Retirement Date for any reason other than the Participant's death or Disability prior to completing three Years of Service, and such Participant incurs a Total Break in Service, such Participant shall not be entitled to any benefit attributable to amounts allocated to the Participant's Profit Sharing Subaccount or ESOP Account prior to such Total Break in Service. If a Participant returns to Service, Years of Service before such return shall be counted, in addition to Years of Service following such return, in determining the Participant's Vested Interest in the amount credited to the Participant's Profit Sharing Subaccount or ESOP Account subsequent to the Participant's return to Service. If such Participant does not complete one Year of Service following his or her return, then the Participant shall not be entitled to any further benefit under the Plan and the non-vested balance of any Profit Sharing Contribution or ESOP Contributions credited or recredited to such Participant's Profit Sharing Subaccount or ESOP Account subsequent to the Participant's return shall be forfeited and reallocated pursuant to Section 4.5 upon the Participant's termination of Service. All forfeitures shall occur in conformity with the ordering rules of Section 54.4975-11(d) of the Regulations. 10.5 Participant's Right to Restoration of Account Upon Return to Service. If a Terminated Participant who had a vested interest in such Participant's Profit Sharing Subaccount or ESOP Account returns to Service prior to incurring a Total Break in Service, the non-vested balance of the Terminated Participant's Account, if any, forfeited pursuant to Section 10.2 shall be recredited to such Participant's Account, provided that, not later than the fifth anniversary of the first date on which the Participant is subsequently employed, such Participant repays the full amount of any distribution made to the Participant upon his or her prior termination of Service. Any amount so repaid, together with any non-vested portion of such Participant's Account recredited pursuant to this Section 10.5, shall be invested in the Trust Fund. If such Participant fails to make a repayment of any distributed amounts pursuant to this Section 10.5, the non-vested portion of such Participant's Account, if any, shall not be recredited. 10.6 Participant's Right to Account Upon Death After Termination of Service. Subject to the provisions of Section 10, if a Terminated Participant dies before payment of the full value of his or her Account from the Trust Fund, an amount equal to the current value of the unpaid portion of the Participant's Vested Interest in his or her Account, including any subsequent contribution allocated to the Terminated Participant's Account pursuant to Sections 6 or 7 with respect to the Plan Year in which the Participant's Service is terminated, shall be distributable, in accordance with the methods and rules of distribution described in Section 11, as soon as practicable following the Participant's death. The value of the Participant's Account shall be determined as of the Valuation Date coincident with or immediately preceding the date of distribution of the Participant's Account. 10.7 Amendment of Vesting Schedule. If the vesting schedule contained in Section 10.3 is amended, each Participant who has completed at least three (3) Years of Service may elect, during the election period specified in this Section, to have his or her vested percentage determined without regard to such amendment. For purposes of this Section, the election period shall begin as of the date on which the amendment changing the vesting schedule is adopted, and shall end on the latest of the following dates: (i) the date occurring sixty (60) days after the Plan amendment is adopted; (ii) the date which is sixty (60) days after the day on which the Plan amendment becomes effective; (iii) the date which is sixty (60) days after the day the Participant is issued written notice of the Plan amendment by the Committee; or (iv) such later date as may be specified by the Committee. The election provided for in this Section shall be made in writing and shall be irrevocable when made. SECTION 11. METHOD OF PAYMENT OF ACCOUNTS AND WITHDRAWALS 11.1 Methods of Payment. Any benefit payable under the Plan, except as otherwise provided in Section 11.2 shall be payable as soon as practicable following the last day of the calendar month in which falls a Participant's termination of Service (or other event requiring a distribution under the Plan), in one lump sum payment from the Trust Fund, provided that the Participant may elect to direct the Committee to directly transfer all or any portion of his or her "eligible rollover distribution" (as defined in Section 11.8 below) to another tax-qualified plan pursuant to Section 401(a)(31) of the Code. A Participant who has no Vested Interest in his or her Account upon his or her termination of Service will be deemed to have received a full distribution of his or her Account as of such date. A Participant may also elect to receive a distribution of his or her Account as soon as practicable following the first anniversary of the last day of the calendar month in which occurs such termination of Service (or other event requiring a distribution under the Plan), or as soon as practicable following the Participant's Normal Retirement Date. 11.2 Commencement of Payment. Notwithstanding any other provision of the Plan to the contrary, (i) if a Participant has a Vested Interest in his or her Account with a value of $3,500 or less it shall be distributed in one lump sum as soon as is administratively feasible following the last day of the calendar month in which such Participant's termination of employment occurs, and (ii) if a Participant has a Vested Interest in his or her Account with a value of more than $3,500 it shall not commence to be distributed without the consent of the Participant before the Participant's Normal Retirement Date. In the absence of receipt of such consent by the Committee, payment of the benefit to such Participant shall commence as soon as practicable after the Participant's attainment of his or her Normal Retirement Date, which benefit shall be in an amount equal to the value of the Participant's distributable Account as of the Valuation Date coincident with or immediately following the Participant's attainment of his or her Normal Retirement Date. In any case where distribution of any benefit amount from the Participant's Cash Contribution Account is to be deferred, the Committee shall either (i) establish or cause to be established a special account for the benefit of the former Participant, to be invested by the Trustee in a fixed investment account established by the Trustee or (ii) cause all amounts in the Participant's Cash Contribution Account deferred by the Participant to be invested at the Participant's election in the same manner as the normal Cash Contribution Accounts maintained for Participants under to the Plan. 11.3 Special Rules For Distribution of Shares. (a) Distribution of a Participant's Vested Interest from his or her Account which is invested in Shares will be made entirely in whole Shares, with the value of any fractional interest in Shares paid in cash. Any cash or other property in a Participant's ESOP Account will be used by the Purchasing Agent to acquire Shares, valued as of the last day of the calendar month in which occurs (i) the Participant's election to receive a distribution of his or her Account pursuant to Section 11.1, (ii) the Participant's termination of Service, in the case of a distribution pursuant to Section 11.2(i), or (iii) the Participant's Normal Retirement Date (or the Participant's death, if earlier), in the case of a distribution pursuant to Section 11.2(ii) to a Participant who failed to consent to a distribution prior to his or her Normal Retirement Date (the "Share Conversion Date"). Notwithstanding the foregoing, if applicable corporate charter or bylaw provisions restrict ownership of substantially all outstanding Shares to Employees or to a plan or trust described in Section 401(a) of the Code, then any distribution of a Participant's Vested Interest in the Participant's ESOP Account shall be in cash. When a distribution consists in whole or in part of Shares, and if such Shares consists of more than one class of securities, the distribution of such Shares shall consist of substantially the same proportion of each such class of Shares as such classes of Shares represent proportions of the Participant's Account. If the record date for dividends payable with respect to Shares distributable to a Participant occurs following the Share Conversion Date, such dividends shall not be considered attributable to such Shares, but shall be considered as earnings of the Fund and allocated among Participants' Accounts pursuant to Section 8.6(b). (b) Notwithstanding anything in Section 11 to the contrary, in the discretion of the Committee, Section 11.1 may not apply to Shares held in a Participant's ESOP Account until the close of the Plan Year in which any Exempt Loan used to acquire such Shares is repaid in full. (c) If at the time of distribution, Shares distributed from the Trust Fund that were acquired with the proceeds of an Exempt Loan are not treated as "readily tradable on an established market" within the meaning of Section 409(h) of the Code and Regulations, such Shares shall be subject to a put option in the hands of a Qualified Holder by which such Qualified Holder may sell all or any part of such Shares to the Trust. Should the Trust decline to purchase all or any part of such Shares, the Employer shall purchase those Shares that the Trust declines to purchase. The put option shall be subject to the following conditions: (i) The term "Qualified Holder" shall mean the Participant or Beneficiary receiving the distribution of such Shares, any other party to whom the Shares are transferred by gift or reason of death, or any trustee of an individual retirement account (as defined under Code Section 408) to which all or any portion of the distributed Shares is transferred pursuant to a tax-free "rollover" transaction satisfying the requirements of Sections 402 and 408 of the Code. (ii) During the 60-day period following any distribution of such Shares, a Qualified Holder shall have the right to require the Trust or the Employer to purchase all or a portion of the distributed Shares held by the Qualified Holder. The purchase price to be paid for any such Shares shall be their fair market value determined as of the Valuation Date coinciding with or immediately preceding the exercise of the put option under this Section 11.3(c)(ii), provided that in the case of a transaction between the Plan and a "disqualified person" within the meaning of Section 4975(e)(2) of the Code, such fair market value shall be determined as of the date of the transaction. (iii) If a Qualified Holder shall fail to exercise such put option, the put option shall temporarily lapse upon the expiration of the 60-day period. As soon as practicable following the last day of the Plan Year in which the 60-day option period expires, the Employer shall notify the non-electing Qualified Holder (if he or she is then a shareholder of record) of the valuation of the Shares as of that date. During the 60-day period immediately following receipt of such valuation notice, the Qualified Holder shall again have the right to require the Employer to purchase all or any portion of the distributed Shares. The purchase price to be paid therefor shall be based on the valuation of the Shares as of the Valuation Date coinciding with or immediately preceding the exercise of the option under this Section 11.3(c)(iii), provided that in the case of a transaction between the Plan and a "disqualified person" within the meaning of Section 4975(e)(2) of the Code, such fair market value shall be determined as of the date of the transaction. (iv) The foregoing put options under Section 11.3(c)(ii) and (iii) hereof shall be effective solely against the Employer and shall not obligate the Plan or Trust in any manner. (v) Except as otherwise required or permitted by the Code, the put options under this Section 11.3(c) shall satisfy the requirements of Section 54.4975-7(b) of the Treasury Regulations to the extent, if any, that such requirements apply to such put options. If a Qualified Holder exercises a put option under this Section 11.3(c), payment for the Shares shall be made in substantially equal annual payments over a period beginning not later than 30 days after the exercise of the put option and not exceeding five years (provided that adequate security and reasonable interest are provided with respect to unpaid amounts). Except as provided in this Section 11.3(c) or in Section 11.2, no shares acquired with the proceeds of an Exempt Loan may be subject to a put, call or other option, or buy-sell or similar arrangement while held by or distributed from the Plan. The rights and protections set forth in this Section 11.3(c) shall be non-terminable. 11.4 Payments to Surviving Spouse or Beneficiary. If a Participant or former Participant dies before the commencement of his or her benefits under the Plan, such Participant's or former Participant's Vested Interest in his or her Account is payable in full to his or her Surviving Spouse. If such Participant has no Surviving Spouse, he or she may designate a Beneficiary pursuant to Section 14. A Participant may with the written consent of his or her spouse elect to designate a Beneficiary other than or in addition to his or her spouse. The written consent of the spouse must acknowledge the effect of such election and must be witnessed by a representative of the Plan or a notary public. Any such election may not be changed without spousal consent. Such an election or revocation must be made in accordance with the procedures developed by the Committee in accordance with the Code and Regulations. 11.5 Latest Date for Commencement of Benefits. (a) Payments will commence no later than 60 days following the latest of the close of the Plan Year in which: (i) the Participant attains his or her Normal Retirement Date, (ii) occurs the 10th anniversary of the year in which the Participant commenced participation in the Plan, or (iii) the Participant terminates his or her Service with the Employer. (b) Notwithstanding the provisions of the foregoing sentence, if the amount payable cannot be ascertained, or, subject to the provisions of Section 20.6, the Participant cannot be located after reasonable efforts, a payment retroactive to the date determined under the foregoing sentence may be made not later than 60 days after the earliest date on which the amount of such payment can be ascertained under the Plan or the date on which the Participant is located (whichever is applicable). (c) Notwithstanding any other provision of the Plan, benefits payable to a Participant shall commence no later than the later of April 1st of the calendar year following the calendar year in which such Participant attains age 70 1/2. (d) If a Participant dies before benefits have commenced, distributions to any Surviving Spouse or Beneficiary shall be made as soon as administratively feasible, but not later than five years after such Participant's death. In the event that payment is made to the Participant's Surviving Spouse, such distribution shall not commence later than the date on which such Participant would have attained age 70 1/2 (or, in either case, on any later date prescribed by Regulations). If the Participant's Surviving Spouse dies after such Participant's death but before distribution has been made to such Surviving Spouse, this Section 11.5(d) shall be applied to require payment of any benefits as if such Surviving Spouse were the Participant. (e) Pursuant to Regulations, any benefit paid to a child shall be treated as if paid to a Participant's Surviving Spouse if such amount would become payable to such Surviving Spouse on the child's attaining majority, or other designated event permitted by Regulations. 11.6 Redirection of Investment of ESOP Account. Effective March 1, 1990, upon both attaining age 50 and completing five Years of Service, a Participant shall be permitted to direct the Plan to transfer all or any portion of the Vested Interest in the Participant's ESOP Account to the Participant's Cash Contribution Account. Under rules prescribed by the Committee, such directions shall be permitted during semi-annual periods, to be determined by the Committee, effective as soon as administratively feasible, but not later than 30 days from the date on which such direction is given, and shall be made in ten percent (10%) increments of the Participant's Vested Interest in his or her ESOP Account. In the event that the Participant's Account does not provide at least three investment options to the Participant other than investment in Shares, the Committee shall provide diversification options to any Participant required to be given such diversification options under Section 401(a)(28)(B) of the Code in a manner consistent with the Code. Notwithstanding the foregoing, the ability to make transfers may be restricted by the Committee to the extent necessary to comply with any applicable federal securities laws (including Rule 144); provided, however, that in no event shall a Participant be prevented from transferring any amount necessary in order to meet the diversification requirements set forth in Section 401(a)(28)(B) of the Code. 11.7 Hardship Withdrawals. (a) A Participant who is an Employee may elect to withdraw all or any portion of the Vested Interest in his or her Cash Contribution Account attributable to Elective Contributions (but excluding any earnings on Elective Contributions accruing after December 31, 1988), Profit Sharing Contributions (if, and only if, the withdrawal is occasioned by a life threatening illness to the Participant) by giving written notice thereof to the Committee specifying such date, which shall not be less than 30 days following the date such notice is given to the Committee. Such notice shall designate that the hardship withdrawal shall be withdrawn from the investment funds in which the Participant has directed investment of the Participant's Cash Contribution Account. (b) The Committee may authorize a hardship withdrawal only for: (i) medical expenses described in Section 213(d) of the Code incurred or immediately anticipated by the Participant, the Participant's spouse, or any dependents of the Participant (as defined in Section 152 of the Code); (ii) the purchase (excluding mortgage payments) of a principal residence of the Participant; (iii) the payment of tuition and related educational fees for the next 12 months of post-secondary education for the Participant or the Participant's spouse, children, or dependents; or (iv) the need to prevent the eviction of the Participant from the Participant's principal residence or foreclosure on the mortgage of the Participant's principal residence. (c) A hardship withdrawal may be authorized only to the extent necessary to satisfy the hardship. A distribution will be deemed to be necessary to satisfy the hardship only if the distribution is not in excess of the amount of the immediate and heavy financial need of the Participant and such Participant's tax obligations as a result of such distribution and the Employee certifies in writing that such a hardship exists (and the Committee has no knowledge to the contrary); provided that the Committee may set stricter standards for making such determination on a nondiscriminatory basis; and provided further that the Participant must obtain the written consent of his or her spouse to the extent required by law. The Committee's decision shall be final and binding on the Participant. (d) In the event that a Participant's Vested Interest is less than 100% at the time of making a withdrawal from his Profit Sharing Subaccount pursuant to Section 11.7(a), the Participant's Vested Interest in his or her Profit Sharing Subaccount at any relevant time thereafter shall be equal to an amount ("X") determined by the following formula: X = P [AB + (R x D)] - (R x D). For purposes of applying the formula: P is the Participant's Vested Interest at the relevant time, AB is the balance of the Participant's Profit Sharing Subaccount at the relevant time; D is the amount distributed to the Participant pursuant to Section 11.7(a); and R is the ratio of the Participant's Profit Sharing Subaccount balance at the relevant time to the Participant's Profit Sharing Subaccount balance immediately after the distribution pursuant to Section 11.7(a). 11.8 Direct Rollovers to Another Qualified Plan or IRA. (a) This Section 11.8 applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section 11.8, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (c) An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code or a qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (d) A distributee includes a Participant or former Participant. In addition, the Participant's or former Participant's Surviving Spouse and the Participant's or former Participant's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the Surviving Spouse, spouse or former spouse. (e) A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. (f) If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Regulations is given, provided that: (1) the Committee clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. 11.9 Certain Securities Law Restrictions. Any distribution of Shares pursuant to this Section 11 shall be subject to all applicable laws, rules and regulations and to such approvals by stock exchanges or governmental agencies as may be deemed necessary or appropriate by the Board of Directors. Each distributee may be required to give the Employer a written representation that such distributee will not be involved in a violation of state or federal securities laws, including the Securities Act of 1933, as amended; the form of such written representation will be prescribed by the Board of Directors. 11.10 Participant Loans. (a) Upon a Participant's written request the Committee may direct the Trustee to make a loan to such Participant from such Participant's Account. Loans to Participants pursuant to this Section 11.10 shall be administered by the Committee and shall be subject to a Participant Loan Policy and such other procedures as may be adopted from time to time by the Committee. The Company shall not have the discretion to refuse a loan request, so long as the terms of the loan comply with the requirements of this Section 11.10 and the Participant Loan Policy. The terms of the loan shall be determined by the Committee, subject to the limits set forth in this Section, and shall be evidenced by the Participant's promissory note. Loans shall be held in a segregated Account of the Trust. (b) The aggregate outstanding balance of all loans to a Participant from this Plan and all other qualified plans maintained by the Employer, when added to any principal repayments on any participant loans made within the twelve-month period preceding the date on which the loan is made, may not exceed the lesser of (i) $50,000 or (ii) 50% of the vested interest in the Participant's Account as of the day of making the loan. (c) Principal and interest shall be repaid in level, periodic installments by payroll deductions not less frequent than quarterly over a definite period of time not to exceed five (5) years, provided, however, that in the case of a loan the proceeds of which are used by the Participant to acquire a principal residence of the Participant, the loan may be repayable over a reasonable period of time in excess of five (5) years as determined by the Committee. (d) All loans shall be secured by a lien on the Participant's interest in the trust. The amount of the loan may not exceed fifty percent (50%) of the value of the Participant's vested Account balance at the time the loan is made. The Committee may determine that any distribution made pursuant to the Plan shall be reduced by an amount up to the outstanding principal and interest balance of the loan. (e) Any loan made pursuant to this Section 11.10 must not constitute a prohibited transaction as defined in Section 4975 of the Code. (f) Loan repayments will be suspended under the Plan as permitted under Section 414(u)(4) of the Code. SECTION 12. MAXIMUM AMOUNT OF ALLOCATION 12.1 Section 415 Limitations. Annual additions to a Participant's Account with respect to any Plan Year may not exceed the limitations set forth in Section 415 of the Code, which are incorporated herein by reference. For these purposes, (i) "annual additions" shall have the meaning set forth in Section 415(c)(2) of the Code, as modified elsewhere in the Code and the Regulations, (ii) the limitation year shall mean the Plan Year unless any other twelve consecutive month period is designated pursuant to a written resolution adopted by the Employer, (iii) "compensation" shall have the meaning set forth in Section 1.415-2(d)(11)(ii), and (iv) "annual additions" shall include annual additions under all other defined contribution plans maintained by the Employer or any affiliated Employer. If the requirements of Section 7.5(a) are satisfied, the term "annual additions" shall not include any amounts credited to the Participant's Account (i) resulting from rollover contributions, (ii) due to Participating Employer contributions relating to interest payments on an Exempt Loan deductible under Section 404(a)(9)(B) of the Code, or (iii) attributable to a forfeiture of Shares acquired with the proceeds of an Exempt Loan. If a Participant in the Plan also participates in any defined benefit plan (as defined in Sections 414(j) and 415(k) of the Code) maintained by the Employer or any Affiliated Employer, in the event that in any Plan Year the sum of the Participant's Defined Benefit Fraction (as defined in Section 415(e)(2) of the Code) and the Participant's Defined Contribution Fraction (as defined in Section 415(e)(3) of the Code) exceed 1.0, the benefit under such defined benefit plan or plans shall be reduced in accordance with the provisions of that plan or those plans, so that the sum of such fractions with respect to the Participant will not exceed 1.0. If this reduction does not ensure that the limitation set forth in this Section 12.1 is not exceeded, then the Annual Addition to any defined contribution plan, other than the Plan, shall be reduced in accordance with the provisions of that plan but only to the extent necessary to ensure that such limitation is not exceeded. 12.2 Refund or Forfeiture of Amounts in Excess of Section 415 Limits. (a) In the event that amounts which would otherwise be allocated to a Participant's Account under the Plan must be reduced by reason of the limitations of Section 12.1, then such reduction shall be made in the following order or priority, but only to the extent necessary: (i) first the Participant's Profit Sharing Contributions shall be forfeited and reallocated pursuant to this Section 12.2; and then (ii) the Participant's Matching Contributions shall be forfeited and reallocated pursuant to this Section 12.2; and then (iii) the Participant's Elective Contributions shall be refunded to the Participant; and then (iv) Shares allocated to the Participant's Account attributable to ESOP Contributions shall be forfeited and reallocated pursuant to this Section 12.2. (b) Forfeitures arising under the Plan and allocable to such Participant in respect of such Plan Year shall be reallocated to the Accounts of other Participants as of the end of the Plan Year for which such reduction is made in the manner provided under Section 4.5 above. (c) If, with respect to any Plan Year, there is an excess contribution on account of the limitations contained in this Section 12.2, and such excess cannot be fully allocated in accordance with Section 12.2(b) because of the limitations prescribed in this Section 12, the amount of such excess which cannot be so allocated shall be held in suspense and allocated in the succeeding Plan Year prior to any other contributions by the Employer for such Plan Year. SECTION 13. VOTING RIGHTS 13.1 Voting of Shares in General. Except as otherwise required by the Act, the Code and the Regulations, all voting rights of Shares held in Participants' Accounts shall be exercised by the Purchasing Agent only as directed by the Participants or their Beneficiaries in accordance with the provisions of this Section 13. 13.2 Voting of Allocated Shares. (a) If any Participating Employer has a registration-type class of securities (as defined in Section 409(e)(4) of the Code or any successor statute thereto), then, with respect to all corporate matters submitted to shareholders, all Shares (including fractional interests in Shares) allocated and credited to the Accounts of Participants shall be voted only in accordance with the directions of such Participants as given to the Purchasing Agent. Any allocated Shares with respect to which Participants are entitled to vote pursuant to this Section 13.2 and for which such directions are not received by the Purchasing Agent shall not be voted by the Purchasing Agent. (b) If no Participating Employer has a registration-type class of securities (as defined in Section 409(e)(4) of the Code or any successor statute thereto), then, only with respect to corporate matters relating to a corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such other similar transaction that Regulations require, all Shares allocated and credited to the Accounts of Participants shall be voted only in accordance with the directions of such Participants as given to the Purchasing Agent. Any allocated Shares with respect to which Participants are entitled to vote pursuant to this Section 13.2 and for which such directions are not received by the Purchasing Agent shall not be voted by the Purchasing Agent. The Purchasing Agent shall vote all Shares held in the Trust Fund allocated to the Accounts of Participants from whom voting instructions are not required to be solicited under Section 13.2 only as the Purchasing Agent directs in the Purchasing Agent's sole discretion in accordance with the Act, after the Purchasing Agent determines such action to be in the best interests of the Participants and their Beneficiaries. 13.3 Mechanics of Voting Allocated Shares. If Participants are entitled under Section 13.2 to direct the vote with respect to allocated Shares, then, at least 30 days before each annual or special shareholders' meeting of the Employer (or, if such schedule cannot be met, as early as practicable before such meeting), the Committee shall furnish to each Participant a copy of the proxy solicitation material sent generally to shareholders, together with a form requesting confidential instructions concerning the manner in which the Shares allocated to such Participant's Account (including fractional Shares to 1/1000th of a Share) are to be voted. Upon timely receipt of such instructions, the Purchasing Agent (after combining votes of fractional Shares to give effect to the greatest extent possible to Participants' instructions) shall vote the Shares as instructed. The instructions received by the Purchasing Agent from each Participant shall be held by the Purchasing Agent in strict confidence and shall not be divulged or released to any person, including, without limitation, any officers or Employees of any Participating Employer, or of any other Employer. The Trustee, the Employer, the Purchasing Agent and the Committee shall not make recommendations to Participants on whether to vote or how to vote. 13.4 Voting of Unallocated Shares and Unvoted Allocated Shares. With respect to unallocated shares held in the Trust Fund and allocated shares held in the Trust Fund for which no voting instructions are received, the Purchasing Agent shall vote such Shares in the same proportions as the Shares for which Participant voting instructions have been received. 13.5 Tender or Exchange of Allocated Shares. The Committee shall notify each Participant of each tender or exchange offer for the Shares and utilize its best efforts to distribute or cause to be distributed to each Participant in a timely manner all information distributed to shareholders of the Employer in connection with any such tender or exchange offer. Each Participant shall have the right from time to time with respect to the Shares allocated to the Participant's Account (including fractional Shares to 1/1000th of a Share) to instruct the Purchasing Agent in writing as to the manner in which to respond to any tender or exchange offer which shall be pending or which may be made in the future for all Shares or any portion thereof. A Participant's instructions shall remain in force until superseded in writing by the Participant. The Purchasing Agent shall tender or exchange whole Shares only as and to the extent so instructed. If the Purchasing Agent does not receive instructions from a Participant regarding any tender or exchange offer for Shares, the Purchasing Agent shall have no discretion in such matter and shall not tender or exchange any such Shares in response thereto. Unless and until Shares are tendered or exchanged, the individual instructions received by the Purchasing Agent from Participants shall be held by the Purchasing Agent in strict confidence and shall not be divulged or released to any person, including, without limitation, any officers or Employees of any Participating Employer, or of any other Employer; provided, however, that the Purchasing Agent shall advise the Employer, at any time upon request, of the total number of Shares not subject to instructions to tender or exchange. 13.6 Tender or Exchange of Unallocated Shares. The Purchasing Agent shall tender unallocated Shares held in the Trust Fund in proportion to the ratio that (A) the number of Shares with respect to which Participant instructions in favor of the tender have been received bears to (B) the number of shares with respect to which Participant instructions for or against the tender have been received, provided the Purchasing Agent determines that such action is consistent with its fiduciary obligations under the Act. Neither the Purchasing Agent, the Committee nor the Trustee shall have the discretion or power to sell, convey or transfer any unallocated Shares held in the Participant's Accounts in response to a tender or exchange offer unless a court of competent jurisdiction determines that the Purchasing Agent is authorized to sell, convey or transfer any unallocated Shares held in the Accounts in response to any tender or exchange offer. In exercising any discretion or power, the Purchasing Agent shall consider, to the extent permitted by applicable law, including the Regulations, not only the potential increase in value, if any, in the Accounts of the Participants as a result of a tender or exchange of the unallocated Shares, but also the impact of any change in the management or control of the Employer in the long run, including but not limited to whether Participants will receive larger or smaller employee benefits than at present under the Plan. 13.7 Voting of Deceased Participant's Shares. If this Section 13 applies to Shares allocated to the Account of a deceased Participant, such Participant's Beneficiary shall be entitled to direct the manner in which to respond to any tender or exchange offer as if such Beneficiary were the Participant. SECTION 14. DESIGNATION OF BENEFICIARIES 14. Designation of Beneficiary. Each Participant shall file with the Committee a written designation of one or more persons as the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon his or her death. A Participant may from time to time revoke or change his or her Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. A Participant's Beneficiary designation shall not be effective to the extent that payments to the Surviving Spouse are required pursuant to Section 11, and in no event shall it be effective as of a date prior to such receipt. 14.2 Failure to Designate Beneficiary. If no such Beneficiary designation is in effect at the time of a Participant's death, or if no designated Beneficiary survives the Participant, the payment of the amount, if any, payable under the Plan upon his or her death shall be made to the Participant's Surviving Spouse, if any; or if the Participant has no Surviving Spouse, then to the Participant's children, if any, in equal shares; or if the Participant has no children, to the Participant's parents, if any, in equal shares; or if the Participant has no parents, to the Participant's brothers and sisters, if any, in equal shares. If the Participant has no brothers or sisters, payment shall be made to the Participant's estate. If the Committee is in doubt as to the right of any person to receive such amount, the Committee may direct the Trustee to retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Committee may direct the Trustee to pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Plan and the Trust Fund therefor. SECTION 15. ADMINISTRATION OF THE PLAN 15.1 The Committee. The Committee shall have general responsibility for the administration, interpretation and construction of the Plan. The Committee shall be responsible for establishing and maintaining Plan records, including responsibility for compliance with the Actual Deferral Percentage and Actual Contribution Percentage tests described in Sections 4.6 and 5.3, and the Committee shall be responsible for complying with the reporting and disclosure requirements of the Act. The Committee shall report to the Board of Directors, or to a committee of the Board of Directors designated for that purpose, periodically as shall be specified by the Board of Directors or such designated committee, with regard to the matters for which it is responsible under the Plan. 15.2 The Trustee. Except as otherwise provided in the Trust Agreement or the Plan, the Trustee may act only as directed by the Committee, the Employer or any other party, as applicable. The Trustee shall have responsibility under the Plan for the management and control of the assets of the Plan. The Committee shall periodically review the performance and methods of the Trustee. The Employer or the Committee shall have the power to appoint, remove or change the Trustee and, to the extent that the Trust Fund is invested in assets other than Shares, shall have the power to appoint or remove one or more investment advisers and to delegate to such adviser authority and discretion to manage (including the power to acquire and dispose of) the assets of the Plan, provided that (i) such adviser with such authority and discretion shall be either a bank or a registered investment adviser under the Investment Advisers Act of 1940, and shall acknowledge in writing that it is a fiduciary with respect to the Plan and (ii) the Committee shall periodically review the investment performance and methods of each adviser(s) with such authority and discretion. The Committee shall establish investment standards and policies and communicate the same to the Trustee. If annuities are to be purchased under the Plan, the Committee shall determine what contracts should be made available to terminated Participants or purchased by the Trust Fund. 15.3 Committee's Responsibility for Entering into Exempt Loans and Valuation of Shares. The Committee shall have responsibility for directing the Trustee as to whether and under what terms it shall enter into an Exempt Loan and for directing the Purchasing Agent whether and under what terms it shall purchase or otherwise dispose of Shares. In the event that there is no generally recognized market for Shares, the Committee shall be the named fiduciary with responsibility for determining the fair market value of the Shares, provided, that any such determination shall be in accordance with applicable Regulations, if any, and the Committee shall, in making such determination, retain an independent appraiser to make such valuation on behalf of the Committee in accordance with Section 7.9. 15.4 Committee's Power to Engage Outside Experts. The Committee may arrange for the engagement of such legal counsel, who may be counsel for the Employer, and make use of such agents and clerical or other personnel as they each shall require or may deem advisable for purposes of the Plan. The Committee may rely upon the written opinion of such counsel and the accountants engaged by the Committee and may delegate to any such agent of said Committee its authority to perform any act hereunder, including without limitation, those matters involving the exercise of discretion, provided that such delegation shall be subject to revocation at any time at the discretion of said Committee. The Committee shall engage such certified public accountants, who may be accountants for the Employer, as it shall require or may deem advisable for purposes of the Plan. 15.5 Composition of Committee. The Committee shall consist of at least three members, each of whom shall be appointed by, shall remain in office at the will of, and may be removed, with or without cause, by the Board of Directors. Any member of said Committee may resign at any time. No member of said Committee shall be entitled to act on or decide any matter relating solely to himself or any of his or her rights or benefits under the Plan. The members of the Committee shall not receive any special compensation for serving in their capacities as members of such Committee but shall be reimbursed for any reasonable expenses incurred in connection therewith. Except as otherwise required by the Act, no bond or other security need be required of the Committee or any member thereof in any jurisdiction. Any member of the Committee, or any agent to whom said Committee delegates any authority, and any other person or group of persons, may serve in more than one fiduciary capacity (including service both as a Trustee and administrator) with respect to the Plan. 15.6 Actions of Committee. The Committee shall elect or designate its own chairman, establish its own procedures and the time and place for its meetings and provide for the keeping of minutes of all meetings. A majority of the members of the Committee shall constitute a quorum for the transaction of business at a meeting of the Committee. Any action of the Committee may be taken upon the affirmative vote of a majority of the members of the Committee at a meeting or, at the direction of its Chairman, without a meeting, by mail, telephone or facsimile, provided that all of the members of the Committee are informed by mail or telephone of their right to vote on the proposal and of the outcome of the vote thereon. 15.7 Disbursement of Plan Funds. The Committee shall cause to be kept full and accurate accounts of receipts and disbursements of the Plan, shall cause to be deposited all funds of the Plan to the name and credit of the Plan in such depositories as may be designated by the Committee, shall cause to be disbursed the monies and funds of the Plan when so authorized by the Committee and shall generally perform such other duties as may be assigned to them from time to time by the Committee. 15.8 Application for Benefits. Each Participant or Beneficiary believing himself eligible for benefits under the Plan shall apply for such benefits by completing and filing with the Committee an application for benefits on a form supplied by the Committee. Before the date on which benefit payments commence, each such application must be supported by such information and data as the Committee deems relevant and appropriate. Evidence of age, marital status (and, in the appropriate instances, health, death or disability) and location of residence shall be require of all applicants for benefits. All claims for benefits under the Plan shall, within a reasonable period of time, be decided by one or more persons designated in writing by the chairman of the Committee. 15.9 Denied Claims for Benefits. In the event that any claim for benefits is denied in whole or in part, the Participant or Beneficiary whose claim has been so denied shall be notified of such denial in writing by the Committee. The notice advising of the denial shall specify the reason or reasons for denial, make specific reference to pertinent Plan provisions, describe any additional material or information necessary for the claimant to perfect the claim (explaining why such material or information is needed) and shall advise the Participant or Beneficiary, as the case may be, of the procedure for the appeal of such denial. All appeals shall be made by the following procedure: (a) The Participant or Beneficiary whose claim has been denied shall file with the Committee a notice of desire to appeal the denial. Such notice shall be filed within sixty (60) days of notification by the Committee of claim denial, shall be made in writing and shall set forth all of the facts upon which the appeal is based. Appeals not timely filed shall be barred. (b) The Committee shall, within thirty (30) days of receipt of the Participant's or Beneficiary's notice of appeal, establish a hearing date on which the Participant or Beneficiary may make an oral presentation to the Committee in support of his or her appeal. The Participant or Beneficiary shall be given not less than ten (10) days' notice of the date set for the hearing. (c) The Committee shall consider the merits of the claimant's written and oral presentations, the merits of any facts or evidence in support of the denial of benefits and such other facts and circumstances as the Committee shall deem relevant. If the claimant elects not to make an oral presentation, such election shall not be deemed adverse to the claimant's interest, and the Committee shall proceed as set forth below as though an oral presentation of the contents of the claimant's written presentation had been made. (d) The Committee shall render a determination upon the appealed claim which determination shall be accompanied by a written statement as to the reasons therefor. The determination so rendered shall be binding on all parties. (e) For all purposes under the Plan, such decisions on claims (where no review is requested) and decisions on review (where review is requested) shall be final, binding and conclusive on all interested persons as to participation and benefit eligibility, the Employee's amount of Compensation and any other matter of fact or interpretation relating to the Plan. 15.10 Indemnification. To the maximum extent permitted by law, no member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member of the Committee or on his or her behalf in the Committee member's capacity as a member of such Committee nor for any mistake of judgment made in good faith, and the Employer shall indemnify and hold harmless, directly from its own assets (including the proceeds of any insurance policy the premiums of which are paid from the Employer's own assets), each member of the Committee and each other officer, employee or director of the Employer to whom any duty or power relating to the administration or interpretation of the Plan or to the management and control of the assets of the Plan may be delegated or allocated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Employer) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or willful misconduct. The Employer shall advance funds for legal expenses to the extent permitted by the Act. 15.11 Agent for Service of Process. The Committee or such other person as may from time to time be designated by the Committee shall be the agent for service of process under the Plan. SECTION 16. EXPENSES 16.1 Payment of Plan Expenses. The expenses incurred in the management and administration of the Plan shall be paid from the Trust Fund, except to the extent the Employer, in its sole discretion, may choose to pay such expenses from time to time; provided that any Trustee expenses paid to The Charles Schwab Trust Company shall be payable solely by the Employer. Such expenses shall include (i) the fees and expenses of any employee and of the Trustee for the performance of their duties under the Plan and Trust Fund (including but not limited to obtaining investment advice, record keeping services and legal services), (ii) the expenses incurred by the members of the Committee in the performance of their duties under the Plan (including reasonable compensation for any legal counsel, certified public accountants, consultants and agents, and cost of services rendered with respect to the Plan) and (iii) all other proper charges and disbursements of the Trustee or the members of the Committee (including settlements of claims or legal actions approved by counsel to the Plan). 16.2 Expenses Attributable to Investment of Plan Assets and Taxes. Brokerage fees, transfer taxes and any other expenses incident to the purchase or sale of securities by the Trustee shall be deemed to be part of the cost of such securities, or deducted in computing the proceeds therefrom, as the case may be. Expenses attributable to investments of the Trust Fund shall be paid out of the Trust Fund, except to the extent the Employer, in its sole discretion, may choose to pay such expenses from time to time; provided that expense entirely attributable to any one investment or to any one investment fund shall be allocated pro rata in accordance with Account balances among Accounts invested in such investment or investment fund. Taxes, if any, of any and all kinds whatsoever which are levied or assessed on any assets held or income received by the Trustee shall be paid out of the Trust Fund. SECTION 17. EMPLOYER PARTICIPATION 17. Adoption of Plan by Affiliated Employer. Any Affiliated Employer may adopt the Plan and the Trust Fund by resolution of its board of directors or equivalent governing body provided that (i) the Board of Directors has not expressly disallowed participation by such Affiliated Employer in the Plan; (ii) the Affiliated Employer has not previously expressly declined to participate in the Plan; or (iii) the Affiliated Employer is not precluded from participating in the Plan by a legally binding written document that precludes such participation; and provided further that the Board of Directors consents to such adoption. Any Affiliated Employer which so adopts the Plan shall be deemed to appoint Charles Schwab & Co., Inc., the Committee and the Trustee its exclusive agents to exercise on its behalf all of the power and authority conferred under the Plan or the Trust Agreement. This authority shall continue until the Plan is terminated and the relevant Trust Fund assets have been distributed. 17.2 Termination of Participation by Participating Employer. A Participating Employer may terminate its participation in the Plan by giving the Committee prior written notice specifying a termination date which shall be the last day of a month at least 60 days subsequent to the date such notice is received by the Committee. The Board of Directors may terminate any Participating Employer's participation in the Plan, as of any termination date specified by the Committee, for the failure of the Participating Employer to make proper contributions or to comply with any other provision of the Plan. 17.3 Effect of Termination of Participation by Participating Employer. Upon termination of the Plan as to any Participating Employer, such Participating Employer shall not make any further contributions under the Plan and no amount shall thereafter be payable under the Plan to or with respect to any Participants then employed by such Participating Employer, except as provided in this Section 17. To the maximum extent permitted by the Act, any rights of Participants no longer employed by such Participating Employer and of former Participants and their Beneficiaries and Surviving Spouses and other eligible survivors under the Plan shall be unaffected by such termination and any transfer, distribution or other disposition of the assets of the Plan as provided in this Section 17 shall constitute a complete discharge of all liabilities under the Plan with respect to such Participating Employer's participation in the Plan and any Participant then employed by such Participating Employer. The interest of each such Participant who is in Service with such Participating Employer as of the termination date is the amount, if any, credited to his or her Account after payment of or provision for expenses and charges and appropriate adjustment of the Accounts of all such Participants for expenses and charges as described in Section 16, and all forfeitures shall be nonforfeitable as of the termination date, and upon receipt by the Committee of IRS approval of such termination, the full current value of such amount shall be paid from the Trust Fund in the manner described in Section 17.4 or transferred to a successor employee benefit plan which is qualified under Section 401(a) of the Code; provided, however, that in the event of any transfer of assets to a successor employee benefit plan the provisions of Section 17.4 will apply. No advances against such payments shall be made prior to such receipt of approval, but after such receipt the Committee, in its sole discretion, may direct the Trustee to make one or more advances in accordance with Section 11.1. All determinations, approvals and notifications referred to above shall be in form and substance and from a source satisfactory to the Committee. To the maximum extent permitted by the Act, the termination of the Plan as to any Participating Employer shall not in any way affect any other Participating Employer's participation in the Plan. 17.4 Limitations on Transfer of Plan Assets to Successor Plan. No transfer of the Plan's assets and liabilities to a successor employee benefit plan (whether by merger or consolidation with such successor plan or otherwise) shall be made unless each Participant would, if either the Plan or such successor plan then terminated, receive a benefit immediately after such transfer which (after taking account of any distributions or payments to such Participants as part of the same transaction) is equal to or greater than the benefit such Participant would have been entitled to receive immediately before such transfer if the Plan had then been terminated. The Committee may also request appropriate indemnification from the employer or employers maintaining such successor plan before making such a transfer. 17.5 Shares Allocated to Suspense Fund Excluded from Transfer of Plan Assets to Successor Plan. Notwithstanding any provision of this Section 17 to the contrary, any Shares allocated to a Suspense Subfund shall not be transferred to a successor employee benefit plan except as is required or permitted by the Committee in accordance with the terms of an Exempt Loan and the Regulations. SECTION 18. AMENDMENT OR TERMINATION OF THE PLAN 18.1 Amendment, Suspension or Termination of Plan. (a) Subject to the provisions of Section 18.1(b) and (c) hereof, the board of directors of the Plan Sponsor reserves the right at any time to suspend or terminate the Plan, any contributions thereunder, or any other agreement or arrangement forming a part of the Plan, in whole or in part and for any reason, and to adopt any amendment or modification thereto, all without the consent of any Participating Employer, Participant, Beneficiary, Surviving Spouse or other eligible survivor. Subject to the provisions of Section 18.1(b) and (c) hereof, the Board of Directors reserves the right at any time to amend or modify the Plan. Each Participating Employer by its adoption of the Plan shall be deemed to have delegated this authority to the Board of Directors. (b) The Board of Directors shall not make any amendment or modification which would (i) retroactively impair any rights to any benefit under the Plan which any Participant, Beneficiary, Surviving Spouse or other eligible survivor would otherwise have had at the date of such amendment by reason of the contributions theretofore made or (ii) make it possible for any part of the funds of the Plan (other than such part as is required to pay taxes, if any, and administration expenses as provided in Section 16) to be used for or diverted to any purposes other than for the exclusive benefit of Participants and their Beneficiaries and Surviving Spouses and other eligible survivors under the Plan prior to the satisfaction of all liabilities with respect thereto. 18.2 Power to Retroactively Amend, Suspend or Terminate Plan Provisions. Subject to the provisions of Section 18.1, any amendment, modification, suspension or termination of any provision of the Plan may be made retroactively if necessary or appropriate to qualify or maintain the Plan as a plan meeting the requirements of Sections 401(a) of the Code or any other applicable provision of law (including the Act) as now in effect or hereafter amended or adopted and the Regulations issued thereunder. 18.3 Notice of Amendment, Suspension or Termination. Notice of any amendment, modification, suspension or termination of the Plan shall be given by the Board of Directors or the board of directors of the Plan Sponsor, as the case may be, to the Trustee and all Participating Employers. 18.4 Effect of Termination of Plan. Upon termination of the Plan, no Participating Employer shall make any further contributions under the Plan and no amount shall thereafter be payable under the Plan to or with respect to any Participant except as provided in this Section 18, and to the maximum extent permitted by the Act, transfers or distributions of the assets of the Plan as provided in this Section 18 shall constitute a complete discharge of all liabilities under the Plan. The provisions of the Plan which are necessary for the operation of the Plan and the distribution or transfer of the assets of the Plan shall remain in force. Upon receipt by the Committee of IRS approval of such termination, the full current value of such adjusted amount, and the full value of each account described in Sections 6.2 and 7.1 above, shall be paid from the Trust Fund to each Participant and former Participant (or, in the event of the death of a Participant or former Participant, to the Surviving Spouse or Beneficiary thereof) in any manner of distribution specified in Section 11 above, including payments which are deferred until the Participant's termination of Service, as the Committee shall determine. Without limiting the foregoing, any such distribution may be made in cash or in property, or both, as the Committee in its sole discretion may direct. All determinations, approvals and notifications referred to above shall be in form and substance and from a source satisfactory to the Committee. 18.5 Partial Termination of Plan. In the event that any governmental authority, including without limitation the IRS, determines that a partial termination (within the meaning of the Act) of the Plan has occurred or if there is a complete discontinuance of Employer contributions then (i) the interest of each Participant affected thereby in his or her Account shall become nonforfeitable as of the date of such partial termination or complete discontinuance of contributions and (ii) the provisions of Sections 18.2, 18.3 and 18.4 above, which in the opinion of the Committee are necessary for the execution of the Plan and the allocation and distribution of the assets of the Plan, shall apply. 18.6 Trust for Exclusive Benefit of Participant. In no event shall any part of the Trust Fund (other than such part as is required to pay taxes, if any, and administration expenses as provided in Section 16 above) be used for or diverted to any purposes other than for the exclusive benefit of Participants and their Beneficiaries and Surviving Spouses under the Plan. SECTION 19. TOP-HEAVY PLAN REQUIREMENTS 19. Top-Heavy Plan - In General. For any Plan Year for which this Plan is a Top-Heavy Plan, the provisions of this Section 19 shall apply notwithstanding any other provisions of the Plan. 19.2 Effect of Top-Heavy Status. Each Participant who (i) is a Non-Key Employee and (ii) is employed on the last day of the Plan Year, shall be entitled to have contributions allocated to his or her Account of not less than three percent (3%) of the Participant's Compensation (the "Minimum Contribution Percentage") regardless of (i) whether such Non-Key Employee has completed a Year of Service, and (ii) the amount of such Non-Key Employee's Compensation; provided, however, that the minimum contribution percentage for any Plan Year shall not exceed the percentage at which contributions are made under the Plan for the Plan Year for the Key Employee for whom such percentage is the highest for such Plan Year. For this purpose, such percentage shall be determined by dividing the contributions made for such Key Employee by so much of his or her Compensation (which solely for this purpose includes Elective Contributions made by the Employer for the Key Employee) for the Plan Year as does not exceed $150,000 (adjusted automatically for increases in accordance with the Regulations). Contributions taken into account under this Section 19.2 shall include contributions under this Plan and under all other defined contribution plans (as defined in Section 414(i) of the Code) required to be included in an Aggregation Group; provided, however, that such contributions shall not include (i) contributions to any defined contribution plan in the required aggregation group if such contributions enable such a defined contribution plan to meet the requirements of Sections 401(a)(4) or 410 of the Code or (ii) contributions under the Social Security Act or any other federal or state law. 19.3 Maintenance of Defined Benefit Plan in Addition to Plan. In the event that the Plan is a Top-Heavy Plan for any Plan Year and the Employer also maintains a defined benefit plan (within the meaning of Section 414 of the Code) which provides benefits on behalf of Participants, then one of the two following provisions shall apply: (1) If the Plan is a Top-Heavy Plan for any Plan Year but would not be a "Top-Heavy Plan" for the Plan Year if "90 percent" were substituted for "60 percent" in Section 19.4(a), then Section 19.2 shall be applied for such Plan Year by substituting "four percent" for "three percent." (2) If a Top-Heavy Plan would continue to be a "Top-Heavy Plan" for the Plan Year if "90 percent" were substituted for "60 percent", then the denominator of the defined contribution plan fraction shall be calculated for such Plan Year by substituting "1.0" for "1.25", except with respect to any Participant who is not entitled to an allocation of Employer contributions and does not receive any accruals under any defined benefit plan (within the meaning of Section 414(j) of the Code) maintained by the Employer. In the event that another defined contribution plan or a defined benefit plan maintained by the Employer provides contributions or benefits on behalf of Participants, the Committee shall take such other plan into account as a part of this Plan to the extent required by the Code and in accordance with the Regulations. In addition, in the event that the Plan is a Top-Heavy Plan (irrespective of whether (1) or (2) applies), all contributions shall be vested according to the following vesting schedule: Years of Service.. Percentage Less than two years ........................................ 0% At least two years but less than three years................ 20% At least three years but less four years.................... 40% At least four years but less than five years................ 60% At least five years but less six years...................... 80% Six years or more........................................... 100% 19.4 Definitions. (a) "Top-Heavy Plan" means this Plan for any Plan Year if, as of the Determination Date, (i) the present value of the Accounts of all Participants who are Key Employees (excluding former Key Employees) exceeds 60 percent of the present value of all Participants' Accounts (excluding former Key Employees) or (ii) the Plan is required to be in an Aggregation Group which for such Plan Year is a Top-Heavy Group. In determining whether the Plan constitutes a Top-Heavy Plan, the Committee shall make the following adjustments: (i) When more than one plan is aggregated, the Committee shall determine separately for each plan as of any Determination Date, the present value of accrued benefits of all Participants and the value of Accounts of all Participants. (ii) Any such determination shall include the present value of distributions made to former Participants under the applicable plan (including a terminated plan) during the five-year period ending on the Determination Date, unless reflected in the value of the accrued benefits or the Accounts of such former Participants as of the Determination Date. (iii) Any such determination shall include any Rollover Contribution from any other plan as follows: (A) If the Rollover Contribution is initiated by the Employee and made to or from a plan maintained by a corporation which is not an Affiliated Employer, the plan providing the distribution shall include such distribution in the value of such accrued benefit or Account. (B) If the Rollover Contribution is not initiated by the Employee or made from a plan maintained by an Affiliated Employer, the plan accepting the distribution shall include such distribution in the value of such accrued benefit or Account. (b) "Determination Date" means for any Plan Year the last day of the next preceding Plan Year. (c) "Aggregation Group" means all plans maintained by the Employer or any Affiliated Employer which are required to be aggregated or permitted to be aggregated. For purposes of this Section 19.4(c), (i) The group of plans that are required to be aggregated (the "required aggregation group") includes each plan of the Employer or any Affiliated Employer in which a Key Employee is a Participant, and each other plan of the Employer or any Affiliated Employer which enables a plan in which a Key Employee is a Participant to meet the requirements of Sections 401(a)(4) or 410 of the Code; and (ii) The group of plans that are permitted to be aggregated (the "permissive aggregation group") includes the required aggregation group plus one or more plans of the Employer or any Affiliated Employer that is not part of the required aggregation group and that the Committee certifies as constituting a plan within the permissive aggregation group. Such plan or plans may be added to the permissive aggregation group only if the permissive aggregation group would continue to meet the requirements of Sections 401(a)(4) and 410 of the Code. (d) "Top Heavy Group" means the Aggregation Group, if as of any Determination Date, the sum of (i) the present value of the accrued benefits of all Participants who are Key Employees under all defined benefit plans (within the meaning of Section 414(j) of the Code) included in the Aggregation Group plus (ii) the aggregate value of the Accounts of all Participants who are Key Employees under all defined contribution plans (within the meaning of Section 414(i) of the Code) included in the Aggregation Group exceeds 60 percent of the sum of (i) the present value of the accrued benefits for all Participants (excluding former Key Employees), under all such defined benefit plans plus (ii) the aggregate value of the Accounts of all Participants (excluding former Key Employees) under all such defined contribution plans. If the Aggregation Group that is a Top-Heavy Group is a required aggregation group, each plan in the Aggregation Group will be a Top-Heavy Plan. If the Aggregation Group that is a Top-Heavy Group is a permissive aggregation group, only those plans that are part of the required aggregation group will be treated as a Top-Heavy Plan. If the Aggregation Group is not a Top-Heavy Group, no plan within such Aggregation Group will be a Top-Heavy Plan. For purposes of Section 19.4(a), the present value of accrued benefits under any defined benefit plan and the value of Accounts under any defined contribution plan shall be determined as of the Valuation Date that is coincident with the Determination Date in accordance with the Regulations. (e) "Key Employee" means any Employee or former Employee who, at any time during the Plan Year preceding the Determination Date or during any of the four preceding Plan Years, is or was one of the following: (i) An officer of the Employer or any Affiliated Employer having annual compensation (within the meaning of Section 414(q)(7)) greater than 50 percent of the amount in effect under Section 415(b)(1)(A) of the Code for any Plan Year (as adjusted for increases in the cost of living in accordance with the Regulations). For purposes of the preceding sentence there shall be treated as officers for any such Plan Year no more than the lesser of: (A) 50 Employees, or (B) the greater of three Employees or 10 percent of the Employees of the Employer or any Affiliated Employer; (ii) One of the ten Employees owning (or considered as owning within the meaning of Section 318 of the Code) more than a five percent (5%) interest and one of the largest interests in the Employer or any Affiliated Employer. An Employee will not be considered such an owner for any Plan Year if the Employee's compensation (within the meaning of Section 414(q)(7)) is less than $30,000 (as adjusted for increases in the cost of living in accordance with the Regulations); for purposes of determining ownership pursuant to Section 19.4(e)(ii) the aggregation rules of Section 4.14(b), (c) and (m) of the Code apply. (iii) Any person who owns (or considered as owning within the meaning of Section 318 of the Code) more than a five percent interest in the Employer; (iv) Any person having compensation (within the meaning of Section 414(q)(7)) of more than $150,000, and owning (or considered as owning within the meaning of Section 318 of the Code) more than a one percent interest in the Employer. For purposes of this Section 19.4(e), a Beneficiary of a Key Employee shall be treated as a Key Employee and the interests inherited by such Beneficiary shall be treated the same as if owned by the Key Employee. (f) "Non-Key Employee" means any "Non-Key Employee" as defined in Section 416(i)(2) of the Code and the Regulations promulgated thereunder. SECTION 20. GENERAL LIMITATIONS AND PROVISIONS 20.1 Exclusive Benefit of Participants and Beneficiaries. In no event shall any part of the funds of the Plan be used for or diverted to any purposes other than for the exclusive benefit of Participants and their Beneficiaries under the Plan except as permitted under Section 403(c) of the Act. Upon the transfer by a Participating Employer of any money to the Trustee, all interest of the Participating Employer therein shall cease and terminate. 20.2 No Rights to Continued Employment. Nothing contained in the Plan shall give any employee the right to be retained in the employment of the Employer or any Affiliated Employer or affect the right of the Employer or any Affiliated Employer to dismiss any employee. The adoption and maintenance of the Plan shall not constitute a contract between the Employer and any employee or be consideration for, or an inducement to or condition of, the employment of any employee. 20.3 Trust Sole Source of Benefits. The Trust Fund shall be the sole source of benefits under the Plan and, except as otherwise required by the Act, the Employer and the Committee assume no liability or responsibility for payment for such benefits, and each Participant, Surviving Spouse, Beneficiary or other person who shall claim the right to any payment under the Plan shall be entitled to look only to the Trust Fund for such payment and shall not have any right, claim or demand therefor against the Employer, the Committee, or any Participant thereof, or any employee or director of the Employer. 20.4 Risk of Decrease in Assets. Each Participant, Beneficiary and Surviving Spouse shall assume all risk in connection with any decrease in the value of the assets of the Trust Fund and the Participants' Accounts or special accounts and neither the Employer nor the Committee shall be liable or responsible therefor. 20.5 Incapacity of Participant or Beneficiary. If the Committee shall find that any person to whom any amount is payable under the Plan is unable to care for his or her affairs because of illness or accident, or is a minor, or has died, then any payment due such person or his or her estate shall be made to his or her duly appointed legal representative. Any such payment shall be a complete discharge of the liability of the Plan and the Trust Fund therefor. 20.6 Antialienation; Qualified Domestic Relations Orders. (a) Except insofar as may otherwise be required by law or pursuant to the terms of a Qualified Domestic Relations Order, as set forth in this Section 20.5, no amount payable at any time under the Plan and the Trust Fund shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind nor in any manner be subject to the debts or liabilities of any person, and any attempt to so alienate or subject any such amount, whether presently or thereafter payable, shall be void. If any person shall attempt to, or shall, alienate, sell, transfer, assign, pledge, attach, charge or otherwise encumber any amount payable under the Plan and Trust Fund, or any part thereof, or if by reason of his or her bankruptcy or other event happening at any such time such amount would be made subject to his or her debts or liabilities or would otherwise not be enjoyed by such person, then the Committee, if it so elects, may direct that such amount be withheld and that the same or any part thereof be paid or applied to or for the benefit of such person. (b) Upon receipt of notification of any judgment, decree or order (including approval of a property settlement agreement) which relates to the provision of child support, alimony payments, or marital property rights of a spouse, former spouse, child, or other dependent of a Participant and which is made pursuant to a state domestic relations law (including a community property law) (herein referred to as a "domestic relations order"), the Committee shall (i) notify the Participant and any prospective Alternate Payee named in the order of the receipt and date of receipt of such domestic relations order and of the Plan's procedures for determining the status of the domestic relations order as a Qualified Domestic Relations Order, and (ii) within a reasonable period after receipt of such order, determine whether it constitutes a Qualified Domestic Relations Order. The Plan's procedures for the determination of whether a domestic relations order constitutes a Qualified Domestic Relations Order shall be set forth by the Committee in writing, shall provide for the notification of each person specified in that order as entitled to payment of benefits under the Plan (at the address included in the domestic relations order) of such procedures promptly upon receipt by the Committee of such domestic relations order, and shall permit the prospective Alternate Payee to designate a representative for receipt of copies of notices that are sent to the prospective Alternate Payee with respect to a domestic relations order. (c) During any period in which the issue of whether a domestic relations order is a Qualified Domestic Relations Order is being determined (by the Committee, by a court of competent jurisdiction, or otherwise), including the period beginning on the date of the Committee's receipt of the order, the Committee shall segregate in a separate account in the Plan or in an escrow account held by a Trustee the amounts, if any, which would have been payable to the Alternate Payee during such period if the order had been determined to constitute a Qualified Domestic Relations Order, provided that if no payments would otherwise be made under the Plan to the Alternate Payee or to the Participant or a Beneficiary of the Participant while the status of the order as a Qualified Domestic Relations Order is being determined, no segregation into a separate or escrow account shall be required. If a domestic relations order is determined to be a Qualified Domestic Relations Order within eighteen (18) months of the date of its receipt by the Committee (or from the beginning of any other period during which the issue of its being a Qualified Domestic Relations Order is being determined by the Committee) the Committee shall cause to be paid to the persons entitled thereto the amounts, if any, held in the separate or escrow account referred to above in one lump sum. If a domestic relations order is determined not be a Qualified Domestic Relations Order, or if the status of the domestic relations order as a Qualified Domestic Relations Order is not finally resolved within such eighteen month period, the Committee shall cause the separate account or escrow account balance to be returned, with interest thereon, to the Participant's Account or to be paid to the person or persons to whom such amount would have been paid if there had been no such domestic relations order, whichever shall apply. Any subsequent determination that such domestic relations order is a Qualified Domestic Relations Order shall be prospective in effect only. (d) (i) Benefits payable to an Alternate Payee shall be payable in one lump sum and in no event shall such benefits continue beyond the lifetime of the Alternate Payee. Such payment may be made at the time specified in the Qualified Domestic Relations Order irrespective of whether the Participant has attained the "earliest retirement age" (within the meaning of Section 414(p)(4)(B) of the Code). In particular, no Alternate Payee shall have the right with respect to any benefit payable by reason of a Qualified Domestic Relations Order to (A) designate a beneficiary with respect to amounts becoming payable under the Plan, (B) elect a method of benefit distribution providing for benefits continuing beyond the Alternate Payee's lifetime, (C) provide survivorship benefits to a spouse or dependent of such Alternate Payee or to any other person, spouse, dependent or other person, or (D) transfer rights under the Qualified Domestic Relations Order by will or by state law of intestacy. (ii) None of the payments, benefits or rights of any Alternate Payee shall be subject to any claim of any creditor, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Alternate Payee. No Alternate Payee shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he or she may expect to receive, contingently or otherwise, under the Plan. (iii) Alternate Payees shall not have any right to (A) borrow money under any Participant loan provisions under the Plan, (B) exercise any Participant investment direction rights or privileges under the Plan, (C) exercise any other election, privilege, option or direction rights of the Participant under the Plan except as specifically provided in the Qualified Domestic Relations Order, or (D) receive communications with respect to the Plan except as specifically provided by law, regulation or the Qualified Domestic Relations Order. (iv) Each Alternate Payee shall advise the Committee in writing of each change of his or her name, address or marital status, and of each change in the provisions of the Qualified Domestic Relations Order or any circumstance set forth therein which may be material to the Alternate Payee's entitlement to benefits thereunder or the amount thereof. Until such written notice has been provided to the Committee, the Committee shall be (A) fully protected in not complying with, and in conducting the affairs of the Plan in a manner inconsistent with, the information set forth in the notice, and (B) required to act with respect to such notice prospectively only, and then only to the extent provided for in the Qualified Domestic Relations Order. The Committee shall not be required to modify or reverse any payment, transaction or application of funds occurring before the receipt of any notice that would have affected such payment, transaction or application of funds, nor shall the Committee or any other party be liable for any such payment, transaction or application of funds. (v) Except as specifically provided for in the Qualified Domestic Relations Order, an Alternate Payee shall have no right to interfere with the exercise by the Participant or by any Beneficiary of their respective rights, privileges and obligations under the Plan. (e) For purposes of this Plan, a Qualified Domestic Relations Order means any judgment, decree, or order (including approval of a property settlement agreement) which has been determined by the Committee in accordance with procedures established under the Plan, to constitute a qualified domestic relations order within the meaning of Section 414(p)(1) of the Code and Alternate Payee means any person entitled to current or future payment of benefits under the Plan pursuant to a Qualified Domestic Relations Order. 20.7 Inability to Locate Participant or Beneficiary. If the Committee cannot ascertain the whereabouts of any person to whom a payment is due under the Plan, and if, after five years from the date such payment is due, a notice of such payment due is mailed to the last known address of such person, as shown on the records of the Committee or the Employer, and within three months after such mailing such person has not made written claim therefor, the Committee, if it so elects, may direct that such payment and all remaining payments otherwise due to such person be canceled on the records of the Plan and the amount thereof applied to reduce the contributions of the Employer, and upon such cancellation, the Plan and the Trust Fund shall, to the maximum extent permitted by the Act, have no further liability therefor except that, in the event such person later notifies the Committee of his or her whereabouts and requests the payment or payments due to such person under the Plan, the amount so applied shall be paid to him or her as provided in Section 11. All elections, designations, requests, notices, instructions, and other communications from the Employer, a Participant, Beneficiary, Surviving Spouse or other person to the Committee required or permitted under the Plan shall be in such form as is prescribed from time to time by the Committee, shall be mailed or delivered to such location as shall be specified by the Committee, and shall be deemed to have been given and delivered only upon actual receipt thereof by the Committee at such location. 20.8 Failure to Receive IRS Approval. Notwithstanding any other provision herein, if this Plan shall not be approved by the IRS under the provisions of the Code and the Regulations for any reason (including failure to comply with any condition for such approval imposed by the IRS) contributions made after the restatement of this Plan and prior to such denial shall be returned, without any liability to any person, within one year after the date of denial of such approval. 20.9 Contributions Conditioned on Deductibility. Notwithstanding any other provision herein, all contributions to the Trust Fund are expressly conditioned upon their deductibility under Section 404 of the Code and the Regulations, and in the event of the final disallowance of the deduction for any contribution, in whole or in part, then such contribution (to the extent the deduction is disallowed) shall upon direction of the Committee, which shall be given in conformity with the provisions of the Act, be returned, without liability to any person, within one year after such final disallowance. 20.10 Mistake of Fact. Notwithstanding any other provisions herein, if any contribution is made by a mistake of fact, such contribution shall upon the direction of the Committee, which shall be given in conformity with the provisions of the Act, be returned, without liability to any person, within one year after the payment of such contribution. 20.11 Communications with Committee. All elections, designations, requests, notices, instructions, and other communications from the Employer, a Participant, Beneficiary, Surviving Spouse or other person to the Committee required or permitted under the Plan shall be in such form as is prescribed from time to time by such Committee, shall be mailed by first-class mail or delivered to such location as shall be specified by such Committee, and shall be deemed to have been given and delivered only upon actual receipt thereof by such Committee at such location. 20.12 Communications with Participants and Beneficiaries. All notices, statements, reports and other communications from the Employer or the Committee to any Employee, Participant, Surviving Spouse, Beneficiary or other person required or permitted under the Plan shall be deemed to have been duly given when delivered to, or when mailed by first-class mail, postage prepaid and addressed to, such Employee, Participant, Surviving Spouse, Beneficiary or other person at his or her address last appearing on the records of the Committee. 20.13 Prior Service Credit. Upon such terms and conditions as the Committee may approve, and subject to any required IRS approval, benefits may be provided under the Plan to a Participant with respect to any period of the Participant's prior employment by any organization, and such benefits (and any Service credited with respect to such period of employment under Section 2.25) may be provided for, in whole or in part, by funds transferred, directly or indirectly (including a rollover from an individual retirement account), to the Trust Fund from an employee benefit plan of such organization which qualified under Section 401(a) of the Code. 20.14 Gender and Number. Except where otherwise required by the context, whenever used in the Plan the masculine gender includes the feminine and the singular shall include the plural. 20.15 Headings. The captions preceding the Sections of the Plan have been inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provisions of the Plan. 20.16 Governing Law. The Plan and all rights thereunder shall be governed by and construed in accordance with the Act and, to the extent not inconsistent therewith, the laws of the State of California. 20.17 Severability of Provisions. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions had not been included. 20.18 Heirs, Assigns and Personal Representatives. The Plan shall be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Participant and Beneficiary, present and future and all persons for whose benefit there exists any QDRO with respect to any Participant (except that no successor to the Plan Sponsor shall be considered a Plan Sponsor unless that successor adopts the Plan). 20.19 Reliance on Data and Consents. The Plan Sponsor, the Employer, each participating Employer, the Board of Directors, the Committee, the Trustee, all fiduciaries with respect to the Plan, and all other persons or entities associated with the operation of the Plan, the management of its assets, and the provision of benefits thereunder, may reasonably rely on the truth, accuracy and completeness of all data provided by any Participant, Surviving Spouse, Beneficiary, and Alternate Payee, including, without limitation, data with respect to age, health and marital status. Furthermore, the Plan Sponsor, the Employer, each participating Employer, the Board of Directors, the Committee, the Trustee, and all fiduciaries with respect to the Plan may reasonably rely on all consents, elections and designations filed with the Plan or those associated with the operation of the Plan and its corresponding Trust by any Participant, Surviving Spouse, Beneficiary, Alternate Payee, or any representative of any such person, without duty to inquire into the genuineness of any such consent, election or designation. None of the aforementioned persons or entities associated with the operation of the Plan, its assets and the benefits provided under the Plan shall have any duty to inquire into any such data, and all may rely on such data being current to the date of reference, it being the duty of the Participants, Surviving Spouses, Beneficiaries and Alternate Payees to advise the appropriate parties of any change in such data. 20.20 Qualified Military Service. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. SECTION 21. APPLICATION TO PUERTO RICO EMPLOYEES 21.1 Modifications Applicable to Puerto Rico. The provisions of this Section shall govern the application of the provisions of the Plan to Participants who are employed by the Company in and are residents of the Commonwealth of Puerto Rico ("Puerto Rico Participants"): (a) Notwithstanding Section 2.25, the definition of "Highly Compensated Participant" shall be a Puerto Rico Participant employed by the Company who receives Compensation that exceeds the Compensation paid to two thirds of the Puerto Rico Participants, as provided in Section 165(e) of the Puerto Rico Income Tax Act; (b) The following shall apply in lieu of the second sentence of Section 5.1(a) hereof: The Salary Reduction Agreement shall provide for Elective Contributions equal to any whole percentage between one percent (1%) and ten Percent (10%) of a Participant's Compensation in any payroll period, not to exceed $7,500 (reduced by any contributions made by the Participant to an IRA) in any calendar year; (c) The Actual Deferral Percentage Test set forth in Section 5.3 shall be applied separately with respect to Puerto Rico Participants. For purposes of applying the Actual Deferral Percentage Test to Puerto Rico Participants, the definition of Highly Compensated Employee contained in subparagraph (a) hereof shall be used; and (d) For purposes of applying subparagraphs (b) and (c) of this Section 21.1, the definition of Compensation contained in Section 2.11 shall be applied without regard to clause (xii) thereof. In all other respects, the terms of this Plan shall apply to Puerto Rico Participants. EX-10 4 EXHIBIT 10.169 Exhibit 10.169 THIRD AMENDMENT TO THE TRUST AGREEMENT FOR THE CHARLES SCHWAB PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN The Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan ("Plan"), which was amended and restated in its entirety effective November 1, 1990, and further amended effective January 1, 1992 and July 1, 1992, is hereby amended as follows, effective as of January 1, 1996: The fifth sentence of Section 5.05(f) is amended to read as follows: Any allocated Employer Securities with respect to which Participants are entitled to issue directions pursuant to the foregoing and for which such directions are not received by the Purchasing Agent shall be voted by the Purchasing Agent in the same proportion as the shares of Employer Securities for which Participant voting instructions have been received. CHARLES SCHWAB & CO., INC. By: /s/ Luis E. Valencia Its: CAO Date: May 8, 1996 THE CHARLES SCHWAB TRUST COMPANY By: /s/ Richard R. Tinervin Its: President and CEO Date: May 3, 1996 EX-10 5 EXHIBIT 10.170 Exhibit 10.170 THE CHARLES SCHWAB CORPORATION 1992 STOCK INCENTIVE PLAN (Restated to include Amendments through May 12, 1997) Article 1. Introduction. The Plan was adopted by the Board of Directors on March 26, 1992. The purpose of the Plan is to promote the long-term success of the Company and the creation of incremental stockholder value by (a) encouraging Non-Employee Directors and Key Employees to focus on long-range objectives, (b) encouraging the attraction and retention of Non-Employee Directors and Key Employees with exceptional qualifications and (c) linking Non-Employee Directors and Key Employees directly to stockholder interests. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Performance Share Awards or Options, which may constitute incentive stock options or nonstatutory stock options. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware. Article 2. Administration. 2.1 The Committee. The Plan shall be administered by the Committee. The Committee shall consist of two or more Non-Employee Directors, who shall be appointed by the Board. 2.2 Committee Responsibilities. The Committee shall select the Key Employees who are to receive Awards under the Plan, determine the amount, vesting requirements and other conditions of such Awards, may interpret the Plan, and make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. Article 3. Limitation on Awards. The aggregate number of Restricted Shares, Performance Share Awards and Options awarded under the Plan shall not exceed 29,150,000 (including those shares awarded prior to the amendment of the Plan). If any Restricted Shares, Performance Share Awards or Options are forfeited, or if any Performance Share Awards terminate for any other reason without the associated Common Shares being issued, or if any Options terminate for any other reason before being exercised, then such Restricted Shares, Performance Share Awards or Options shall again become available for Awards under the Plan. The limitation of this Article 3 shall be subject to adjustment pursuant to Article 10. Any Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. Subject to the overall limit on the aggregate shares set forth above, the following limitations shall apply: (a) The maximum number of Common Shares which may be granted subject to an Option to any one Participant in any one fiscal year shall be 500,000; and (b) The maximum number of Restricted Shares or Performance Share Awards which may be granted to any one Participant in any one fiscal year shall be 200,000. Article 4. Eligibility. 4.1 General Rule. Key Employees and Non-Employee Directors shall be eligible for designation as Participants by the Committee. 4.2 Non-Employee Directors. In addition to any awards pursuant to Section 4.1, Non-Employee Directors shall be entitled to receive the automatic NSOs described in this Section 4.2. (a) Each Non-Employee Director shall receive a Non-Officer Stock Option covering 2,500 Common Shares for each Award Year with respect to which he or she serves as a Non-Employee Director on the grant date described in subsection (b) below; provided that the Non-Officer Stock Option shall cover 1,500 shares if the Exercise Price determined as of the grant date, is $35 or more; (b) The NSO for a particular Award Year shall be granted to each Non-Employee Director as of May 15 of each Award Year, and if May 15 is not a business day, then the grant shall be made on and as of the next succeeding business day; (c) Each NSO shall be exercisable in full at all times during its term; (d) The term of each NSO shall be 10 years; provided, however, that any unexercised NSO shall expire on the date that the Optionee ceases to be a Non-Employee Director or a Key Employee for any reason other than death or disability. If an Optionee ceases to be a Non-Employee Director or Key Employee on account of death or disability, any unexercised NSO shall expire on the earlier of the date 10 years after the date of grant or one year after the date of death or disability of such Director; and (e) The Exercise Price under each NSO shall be equal to the Fair Market Value on the date of grant and shall be payable in any of the forms described in Article 6. 4.3 Ten-Percent Stockholders. A Key Employee who owns more than 10 percent of the total combined voting power of all classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for the grant of an ISO unless (a) the Exercise price under such ISO is at least 110 percent of the Fair Market Value of a Common Share on the date of grant and (b) such ISO by its terms is not exercisable after the expiration of five years from the date of grant. 4.4 Attribution Rules. For purposes of Section 4.3, in determining stock ownership, a Key Employee shall be deemed to own the stock owned, directly or indirectly, by or for his or her brothers, sisters, spouse, ancestors or lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its stockholders, partners or beneficiaries. Stock with respect to which the Key Employee holds an option shall not be counted. 4.5 Outstanding Stock. For purposes of Section 4.3, "outstanding stock" shall include all stock actually issued and outstanding immediately after the grant of the ISO to the Key Employee. "Outstanding stock" shall not include treasury shares or shares authorized for issuance under outstanding options held by the Key Employee or by any other person. Article 5. Options. 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan, and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. The Committee may designate all or any part of an Option as an ISO, except for Options granted to Non-Employee Directors under Section 4.2. The Committee may designate all or any part of an Option as an ISO (or, in the case of a Key Employee who is subject to the tax laws of a foreign jurisdiction, as an option qualifying for favorable tax treatment under the laws of such foreign jurisdiction), except for Options granted to Non-Employee Directors under section 4.2. 5.2 Options Nontransferability. No Option granted under the Plan shall be transferable by the Optionee other than by will or the laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by him or her. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. 5.3 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10. Each Stock Option Agreement shall also specify whether the Option is an ISO or an NSO. 5.4 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price under an Option shall not be less than 100 percent of the Fair Market Value of a Common Share on the date of grant, except as otherwise provided in Section 4.3. Subject to the preceding sentence, the Exercise Price under any Option shall be determined by the Committee. The Exercise Price shall be payable in accordance with Article 6. 5.5 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option. The term of an ISO shall in no event exceed 10 years from the date of grant, and Section 4.3 may require a shorter term. Subject to the preceding sentence, the Committee shall determine when all or any part of an Option is to become exercisable and when such Option is to expire; provided that, in appropriate cases, the Company shall have the discretion to extend the term of an Option or the time within which, following termination of employment, an Option may be exercised, or to accelerate the exercisability of an Option. A Stock Option Agreement may provide for accelerated exercisability in the event of the Participant's death, disability, Retirement, or other termination of employment and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's employment; provided that upon an Optionee's Retirement, the exercisability of all outstanding Options shall be accelerated, other than any Options that had been granted within two years of the date of the Optionee's Retirement. Except as provided in Section 4.2, NSOs may also be awarded in combination with Restricted Shares, and such an Award may provide that the NSOs will not be exercisable unless the related Restricted Shares are forfeited. In addition, NSOs granted under this Section 5 may be granted subject to forfeiture provisions which provide for forfeiture of the Option upon the exercise of tandem awards, the terms of which are established in other programs of the Company. 5.6 Limitation on Amount of ISOs. The aggregate fair market value (determined at the time the ISO is granted) of the Common Shares with respect to which ISOs are exercisable for the first time by the Optionee during any calendar year (under all incentive stock option plans of the Company) shall not exceed $100,000; provided, however, that all or any portion of an Option which cannot be exercised as an ISO because of such limitation shall be treated as an NSO. 5.7 Effect of Change in Control. The Committee (in its sole discretion) may determine, at the time of granting an Option, that such Option shall become fully exercisable as to all Common Shares subject to such Option immediately preceding any Change in Control with respect to the Company. 5.8 Restrictions on Transfer of Common Shares. Any Common Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Common Shares. 5.9 Authorization of Replacement Options. Concurrently with the grant of any Option to a Participant (other than NSOs granted pursuant to Section 4.2), the Committee may authorize the grant of Replacement Options. If Replacement Options have been authorized by the Committee with respect to a particular award of Options (the "Underlying Options"), the Option Agreement with respect to the Underlying Options shall so state, and the terms and conditions of the Replacement Options shall be provided therein. The grant of any Replacement Options shall be effective only upon the exercise of the Underlying Options through the use of Common Shares pursuant to Section 6.2 or Section 6.3. The number of Replacement Options shall equal the number of Common Shares used to exercise the Underlying Options, and, if the Option Agreement so provides, the number of Common Shares used to satisfy any tax withholding requirements incident to the exercise of the Underlying Options in accordance with Section 13.2. Upon the exercise of the Underlying Options, the Replacement Options shall be evidenced by an amendment to the Underlying Option Agreement. Notwithstanding the fact that the Underlying Option may be an ISO, a Replacement Option is not intended to qualify as an ISO. The Exercise Price of a Replacement Option shall be no less than the Fair Market Value of a Common Share on the date the grant of the Replacement Option becomes effective. The term of each Replacement Option shall be equal to the remaining term of the Underlying Option. No Replacement Options shall be granted to Optionees when Underlying Options are exercised pursuant to the terms of the Plan and the Underlying Option Agreement following termination of the Optionee's employment. The Committee, in its sole discretion, may establish such other terms and conditions for Replacement Options as it deems appropriate. 5.10 Options Granted to Non-United States Key Employees. In the case of Key Employees who are subject to the tax laws of a foreign jurisdiction, the Company may issue Options to such Key Employees that contain terms required to conform with any requirements for favorable tax treatment imposed by the laws of such foreign jurisdiction, or as otherwise may be required by the laws of such foreign jurisdiction. The terms of any such Options shall be governed by the Plan, subject to the terms of any Addendum to the Plan specifically applicable to such Options. Article 6. Payment for Option Shares. 6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash at the time when such Common Shares are purchased, except as follows: (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. However, the Committee may specify in the Stock Option Agreement that payment may be made pursuant to Section 6.2 or 6.3. (b) In the case of an NSO, the Committee may at any time accept payment pursuant to Section 6.2 or 6.3. 6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be made with Common Shares which are surrendered to the Company. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. In the event that the Common Shares being surrendered are Restricted Shares that have not yet become vested, the same restrictions shall be imposed upon the new Common Shares being purchased. 6.3 Exercise/Sale. To the extent this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares (including the Common Shares to be issued upon exercise of the Options) and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. Article 7. Restricted Shares and Performance Share Awards. 7.1 Time, Amount and Form of Awards. The Committee may grant Restricted Shares or Performance Share Awards with respect to an Award Year during such Award Year or at any time thereafter. Each such Award shall be evidenced by a Stock Award Agreement between the Award recipient and the Company. The amount of each Award of Restricted Shares or Performance Share Awards shall be determined by the Committee. Awards under the Plan may be granted in the form of Restricted Shares or Performance Share Awards or in any combination thereof, as the Committee shall determine at its sole discretion at the time of the grant. Restricted Shares or Performance Share Awards may also be awarded in combination with NSOs, and such an Award may provide that the Restricted Shares or Performance Share Awards will be forfeited in the event that the related NSOs are exercised. 7.2 Payment for Restricted Share Awards. To the extent that an Award is granted in the form of Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of such Restricted Shares. 7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares shall become vested, in full or in installments, upon satisfaction of the conditions specified in the Stock Award Agreement. Common Shares shall be issued pursuant to Performance Share Awards in full or in installments upon satisfaction of the issuance conditions specified in the Stock Award Agreement. The Committee shall select the vesting conditions in the case of Restricted Shares, or issuance conditions in the case of Performance Share Awards, which may be based upon the Participant's service, the Participant's performance, the Company's performance or such other criteria as the Committee may adopt. A Stock Award Agreement may also provide for accelerated vesting or issuance, as the case may be, in the event of the Participant's death, disability or Retirement. The Committee, in its sole discretion, may determine, at the time of making an Award of Restricted Shares, that such Award shall become fully vested in the event that a Change in Control occurs with respect to the Company. The Committee, in its sole discretion, may determine, at the time of making a Performance Share Award, that the issuance conditions set forth in such Award shall be waived in the event that a Change in Control occurs with respect to the Company. The Committee shall have the discretion to adjust the payouts associated with Awards downward. Unless and until (i) the rules set forth under Code Section 162(m) permit discretionary adjustments to increase payouts; or (ii) the Committee determines that compliance with Code Section 162(m) is not desired with respect to some or all Named Executive Officers, no payout associated with an Award held by a Named Executive Officer shall be discretionarily adjusted upward in a manner that would eliminate the ability of the Award to satisfy the "performance-based" exception under Treasury Regulation Section 1.162-27(e)(2). 7.4 Form of Settlement of Performance Share Awards. Settlement of Performance Share Awards shall only be made in the form of Common Shares. Until a Performance Share Award is settled, the number of Performance Share Awards shall be subject to adjustment pursuant to Article 10. 7.5 Death of Recipient. Any Common Shares that are to be issued pursuant to a Performance Share Award after the recipient's death shall be delivered or distributed to the recipient's beneficiary or beneficiaries. Each recipient of a Performance Share Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient's death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Common Shares that are to be issued pursuant to a Performance Share Award after the recipient's death shall be delivered or distributed to the recipient's estate. The Committee, in its sole discretion, shall determine the form and time of any distribution(s) to a recipient's beneficiary or estate. Article 8. Claims Procedures. Claims for benefits under the Plan shall be filed in writing with the Committee on forms supplied by the Committee. Written notice of the disposition of a claim shall be furnished to the claimant within 90 days after the claim is filed. If the claim is denied, the notice of disposition shall set forth the specific reasons for the denial, citations to the pertinent provisions of the Plan, and, where appropriate, an explanation as to how the claimant can perfect the claim. If the claimant wishes further consideration of his or her claim, the claimant may appeal a denied claim to the Committee (or to a person designated by the Committee) for further review. Such appeal shall be filed in writing with the Committee on a form supplied by the Committee, together with a written statement of the claimant's position, no later than 90 days following receipt by the claimant of written notice of the denial of his or her claim. If the claimant so requests, the Committee shall schedule a hearing. A decision on review shall be made after a full and fair review of the claim and shall be delivered in writing to the claimant no later than 60 days after the Committee's receipt of the notice of appeal, unless special circumstances (including the need to hold a hearing) require an extension of time for processing the appeal, in which case a written decision on review shall be delivered to the claimant as soon as possible but not later than 120 days after the Committee's receipt of the appeal notice. The claimant shall be notified in writing of any such extension of time. The written decision on review shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and shall specifically refer to the pertinent Plan provisions on which it is based. All determinations of the Committee shall be final and binding on Participants and their beneficiaries. Article 9. Voting Rights and Dividends. 9.1 Restricted Shares. (a) All holders of Restricted Shares who are not Named Executive Officers shall have the same voting, dividend, and other rights as the Company's other stockholders. (b) During the period of restriction, Named Executive Officers holding Restricted Shares granted hereunder shall be credited with all regular cash dividends paid with respect to all Restricted Shares while they are so held. If a dividend is paid in the form of cash, such cash dividend shall be credited to Named Executive Officers subject to the same restrictions on transferability and forfeitability as the Restricted Shares with respect to which they were paid. If any dividends or distributions are paid in shares of Common Stock, the shares of Common Stock shall be subject to the same restrictions on transferability and forfeitability as the Restricted Shares with respect to which they were paid. Subject to the succeeding paragraph, and to the restrictions on vesting and the forfeiture provisions, all dividends credited to a Named Executive Officer shall be paid to the Named Executive Officer within forty-five (45) days following the full vesting of the Restricted Shares with respect to which such dividends were earned. In the event that any dividend constitutes a "derivative security" or an "equity security" pursuant to Rule 16(a) under the Exchange Act, such dividend shall be subject to a vesting period equal to the longer of: (i) the remaining vesting period of the Restricted Shares with respect to which the dividend is paid; or (ii) six (6) months. The Committee shall establish procedures for the application of this provision. Named Executive Officers holding Restricted Shares shall have the same voting rights as the Company's other stockholders. 9.2 Performance Share Awards. The holders of Performance Share Awards shall have no voting or dividend rights until such time as any Common Shares are issued pursuant thereto, at which time they shall have the same voting, dividend and other rights as the Company's other stockholders. Article 10. Protection Against Dilution; Adjustment of Awards. 10.1 General. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar occurrence, the Committee shall make appropriate adjustments in one or more of (a) the number of Options, Restricted Shares and Performance Share Awards available for future Awards under Article 3, (b) the number of Performance Share Awards included in any prior Award which has not yet been settled, (c) the number of Common Shares covered by each outstanding Option or (d) the Exercise Price under each outstanding Option. 10.2 Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Options, Restricted Shares and Performance Share Awards shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting or for settlement in cash. 10.3 Reservation of Rights. Except as provided in this Article 10, a Participant shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Common Shares subject to an Option. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. Article 11. Limitation of Rights. 11.1 Employment Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain employed by the Company or any Subsidiary. The Company and its Subsidiaries reserve the right to terminate the employment of any employee at any time, with or without cause, subject only to a written employment agreement (if any). 11.2 Stockholders' Rights. A Participant shall have no dividend rights, voting or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the issuance of such Common Shares, whether by issuance of a certificate, book entry or other procedure. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Articles 7, 9 and 10. 11.3 Creditors' Rights. A holder of Performance Share Awards shall have no rights other than those of a general creditor of the Company. Performance Share Awards represent unfunded and unsecured obligations of the Company, subject to the terms and conditions of the applicable Stock Award Agreement. 11.4 Government Regulations. Any other provision of the Plan notwithstanding, the obligations of the Company with respect to Common Shares to be issued pursuant to the Plan shall be subject to all applicable laws, rules and regulations, and such approvals by any governmental agencies as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award until such time as: (a) Any legal requirements or regulations have been met relating to the issuance of such Common Shares or to their registration, qualification or exemption from registration or qualification under the Securities Act of 1933, as amended, or any applicable state securities laws; and (b) Satisfactory assurances have been received that such Common Shares, when issued, will be duly listed on the New York Stock Exchange or any other securities exchange on which Common Shares are then listed. Article 12. Limitation of Payments. 12.1 Basic Rule. Any provision of the Plan to the contrary notwithstanding, in the event that the independent auditors most recently selected by the Board (the "Auditors") determine that any payment or transfer in the nature of compensation to or for the benefit of a Participant, whether paid or payable (or transferred or transferable) pursuant to the terms of this Plan or otherwise (a "Payment"), would be nondeductible for federal income tax purposes because of the provisions concerning "excess parachute payments" in section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount; provided, however, that the Committee, at the time of making an Award under this Plan or at any time thereafter, may specify in writing that such Award shall not be so reduced and shall not be subject to this Article 12. For purposes of this Article 12, the "Reduced Amount" shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of section 280G of the Code. 12.2 Reduction of Payments. If the Auditors determine that any Payment would be nondeductible because of section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election, the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Article 12, present value shall be determined in accordance with section 280G(d)(4) of the Code. All determinations made by the Auditors under this Article 12 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan, and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan. 12.3 Overpayments and Underpayments. As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made (an "Overpayment") or that additional Payments which will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which he or she shall repay to the Company on demand, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. 12.4 Related Corporations. For purposes of this Article 12, the term "Company" shall include affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code. Article 13. Withholding Taxes. 13.1 General. To the extent required by applicable federal, state, local or foreign law, the recipient of any payment or distribution under the Plan shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of such payment or distribution. The Company shall not be required to make such payment or distribution until such obligations are satisfied. 13.2 Nonstatutory Options, Restricted Shares or Performance Share Awards. The Committee may permit an Optionee who exercises NSOs, or who receives Awards of Restricted Shares, or who receives Common Shares pursuant to the terms of a Performance Share Award, to satisfy all or part of his or her withholding tax obligations by having the Company withhold a portion of the Common Shares that otherwise would be issued to him or her under such Awards. Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. The payment of withholding taxes by surrendering Common Shares to the Company, if permitted by the Committee, shall be subject to such restrictions as the Committee may impose, including any restrictions required by rules of the Securities and Exchange Commission. Article 14. Assignment or Transfer of Award. Any Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor's process, whether voluntarily, involuntarily or by operation of law. However, this Article 14 shall not preclude (i) a Participant from designating a beneficiary to succeed, after the Participant's death, to those of the Participant's Awards (including without limitation, the right to exercise any unexercised Options) as may be determined by the Company from time to time in its sole discretion, or (ii) a transfer of any Award hereunder by will or the laws of descent or distribution. Article 15. Future of Plans. 15.1 Term of the Plan. The Plan, as set forth herein, shall become effective on May 8, 1992. The Plan shall remain in effect until it is terminated under Section 15.2, except that no ISOs shall be granted after May 7, 2002. 15.2 Amendment or Termination. The Committee may, at any time and for any reason, amend or terminate the Plan; provided, however, that any amendment of the Plan shall be subject to the approval of the Company's stockholders to the extent required by applicable laws, regulations or rules. 15.3 Effect of Amendment or Termination. No Award shall be made under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Option, Restricted Share or Performance Share Award previously granted under the Plan. Article 16. Definitions. 16.1 "Award" means any award of an Option, a Restricted Share or a Performance Share Award under the Plan. 16.2 "Award Year" means a fiscal year beginning January 1 and ending December 31 with respect to which an Award may be granted. 16.3 "Board" means the Company's Board of Directors, as constituted from time to time. 16.4 "Change in Control" means the occurrence of any of the following events after the effective date of the Plan as set out in Section 15.1: (a) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act; (b) A change in the composition of the Board, as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; (c) Any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. 16.5 "Code" means the Internal Revenue Code of 1986, as amended. 16.6 "Committee" means the Compensation Committee of the Board, as constituted from time to time. 16.7 "Common Share" means one share of the common stock of the Company. 16.8 "Company" means The Charles Schwab Corporation, a Delaware corporation. 16.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 16.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 16.11 "Exercise Price" means the amount for which one Common Share may be purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement. 16.12 "Fair Market Value" means the market price of a Common Share, determined by the committee as follows: (a) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (b) If the Common Share was traded over-the-counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (c) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (d) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. 16.13 "ISO" means an incentive stock option described in section 422(b) of the Code. 16.14 "Key Employee" means a key common-law employee of the Company or any Subsidiary, as determined by the Committee. 16.15 "Named Executive Officer" means a Participant who, as of the date of vesting of an Award is one of a group of "covered employees," as defined in the Regulations promulgated under Code Section 162(m), or any successor statute. 16.16 "Non-Employee Director" means a member of the Board who is not a common-law employee. 16.17 "NSO" means an employee stock option not described in sections 422 through 424 of the Code. 16.18 "Option" means an ISO or NSO or, in the case of a Key Employee who is subject to the tax laws of a foreign jurisdiction, an option qualifying for favorable tax treatment under the laws of such jurisdiction, including a Replacement Option, granted under the Plan and entitling the holder to purchase one Common Share. 16.19 "Optionee" means an individual, or his or her estate, legatee or heirs at law that holds an Option. 16.20 "Participant" means a Non-Employee Director or Key Employee who has received an Award. 16.21 "Performance Share Award" means the conditional right to receive in the future one Common Share, awarded to a Participant under the Plan. 16.22 "Plan" means this 1992 Stock Incentive Plan of The Charles Schwab Corporation, as it may be amended from time to time. 16.23 "Replacement Option" means an Option that is granted when a Participant uses a Common Share held or to be acquired by the Participant to exercise an Option and/or to satisfy tax withholding requirements incident to the exercise of an Option. 16.24 "Restricted Share" means a Common Share awarded to a Participant under the Plan. 16.25 "Stock Award Agreement" means the agreement between the Company and the recipient of a Restricted Share or Performance Share Award which contains the terms, conditions and restrictions pertaining to such Restricted Share or Performance Share Award. 16.26 "Stock Option Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her option. 16.27 "Subsidiary" means any corporation, if the Company and/or one or more other Subsidiaries own not less than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. 16.28. "Retirement" shall mean any termination of employment of an Optionee for any reason other than death at any time after the Optionee has attained fifty (50), but only if, at the time of such termination, the Participant has been credited with at least seven (7) Years of Service under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing definition shall apply to all Stock Option Agreements entered into pursuant to the Plan, irrespective of any definition to the contrary contained in any such Stock Option Agreement. ADDENDUM A The provisions of the Plan, as amended by the terms of this Addendum A, shall apply to the grant of Approved Options to Key U.K. Employees. 1. For purposes of this Addendum A, the following definitions shall apply in addition to those set out in section 16 of the Plan: Approved Option Means a stock option designed to qualify as an approved executive share option under the Taxes Act; Inland Revenue means the Board of the Inland Revenue in the United Kingdom. Key U.K. Employee means a designated employee of Sharelink Investment Services plc or any subsidiary (as that term is defined in the Companies Act 1985 of the United Kingdom, as amended) of which Sharelink Investment Services plc has control for the purposes of section 840 of the Taxes Act; Taxes Act means the Income and Corporation Taxes Act 1988 of the United Kingdom. 2. An Approved Option may only be granted to a Key U.K. Employee who: (i) is employed on a full-time basis; and (ii) does not fall within the provisions of paragraph 8 of Schedule 9 to the Taxes Act. For purposes of this section 2(i) of Addendum A, "full-time" shall mean an employee who is required to work 20 hours per week, excluding meal breaks. 3. No Approved Option may be granted to a Key U.K. Employee if it would cause the aggregate of the exercise price of all subsisting Approved Options granted to such employee under the Plan, or any other subsisting options granted to such employee under any other share option scheme approved under Schedule 9 of the Taxes Act and established by the Company or an associated company, to exceed the higher of (a) one hundred thousand pounds sterling and (b) four times such employee's relevant emoluments for the current or preceding year of assessment (whichever is greater); but where there were no relevant emoluments for the previous year of assessment, the limit shall be the higher of one hundred thousand pounds sterling or four times such employee's relevant emoluments for the period of twelve months beginning with the first day during the current year of assessment in respect of which there are relevant emoluments. For the purpose of this section 3 of Addendum A, "associated company" means an associated company within the meaning of section 416 of the Taxes Act; "relevant emoluments" has the meaning given by paragraph 28(4) of Schedule 9 to the Taxes Act and "year of assessment" means a year beginning on any April 6 and ending on the following April 5. 4. Common Shares issued pursuant to the exercise of Approved Options must satisfy the conditions specified in paragraphs 10 to 14 of Schedule 9 to the Taxes Act. 5. Notwithstanding the provisions of Section 5.4 of the Plan, the exercise price of an Approved Option shall not be less than 100 percent of the closing price of a Common Share as reported in the New York Stock Exchange Composite Index on the date of grant. 6. No Approved Option may be exercised at any time by a Key U.K. Employee when that Key U.K. Employee falls within the provisions of paragraph 8 of Schedule 9 to the Taxes Act. If at any time the shares under an Approved Option cease to comply with the conditions in paragraphs 10 to 14 of Schedule 9 to the Taxes Act, then all Approved Options then outstanding shall lapse and cease to be exercisable from the date of the shares ceasing so to comply, and no optionee shall have any cause of action against the Company, Sharelink Investment Services plc or any subsidiary of the Company or any other person in respect thereof. 7. An Approved Option may contain such other terms, provisions and conditions as may be determined by the Committee consistent with the Plan, provided that the approved option otherwise complies with the requirements for approved executive option schemes specified in Schedule 9 of the Taxes Act. 8. In relation to an Approved Option, notwithstanding the terms of section 10.1 of the Plan, no adjustment shall be made pursuant to section 10.1 of the Plan to any outstanding Approved Options without the prior approval of the Inland Revenue. 9. In relation to an Approved Option any Key U.K. Employee shall make arrangements satisfactory to the Company for the satisfaction of any tax withholding or deduction -- at -- source obligations that arise by reason of the grant to him or her of such option, or its subsequent exercise. 10. In relation to an Approved Option, in addition to the provisions set out in section 15.2 of the Plan, no amendment which affects any of the provisions of the Plan relating to Approved Options shall be effective until approved by the Inland Revenue, except for such amendment as are required to obtain and maintain the approval of Inland Revenue pursuant to Schedule 9 to the Taxes Act. EX-10 6 EXHIBIT 10.171 Exhibit 10.171 THE CHARLES SCHWAB CORPORATION 1992 STOCK INCENTIVE PLAN RESTRICTED SHARES AWARD AGREEMENT THIS AGREEMENT is entered into between The Charles Schwab Corporation, a Delaware corporation (the "Company") and ____ (the "Employee"). WITNESSETH: WHEREAS, the Company has adopted The Charles Schwab Corporation 1992 Stock Incentive Plan (the "Plan"), which provides for the granting of restricted shares of Common Stock of the Company ("Restricted Shares") to key employees of the Company and its Subsidiaries; and WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Committee"), which is responsible for the administration of the Plan, has authorized the granting of an award of Restricted Shares to the Employee, effective as of _____________________; and WHEREAS, this Agreement is prepared in conjunction with and pursuant to the terms of the Plan and, although all of the terms of the Plan and the definitions used in this Plan have not been set forth herein, such terms and definitions are incorporated herein and made a part hereof by reference, and, except as otherwise expressly stated herein, the provisions of the Plan shall govern any interpretation of this Agreement; and WHEREAS, the Employee has accepted the grant of Restricted Shares and agreed to the terms and conditions hereinafter stated; NOW, THEREFORE, the Employee and the Company agree to the provisions set forth in the Agreement. The Employee signifies agreement with all of the terms and conditions of this Agreement by failing to provide written objection to the Company to any of the terms hereunder within 30 days of receipt of this Agreement, and in any event by accepting any dividends paid with respect to the Restricted Shares granted hereunder. 1. Grant of Restricted Shares. The Company hereby grants to the Employee, as a separate incentive in connection with his or her employment and not in lieu of any salary or other cash compensation for his or her services, an award of ____ Restricted Shares, effective_____________, subject to all the terms and conditions in this Agreement and the Plan. 2. Restriction on Transfer. The Restricted Shares awarded pursuant to this Agreement shall be issued in the name of The Employee and held by the Secretary of the Company as escrow agent (the "Escrow Agent"), and shall not be sold, transferred, otherwise disposed of, pledged or otherwise hypothecated until the date such Restricted Shares become vested pursuant to paragraph 3 hereof (the "Restriction on Transfer"). The Company may instruct the transfer agent for its Common Stock to place a legend on the certificates representing the Restricted Shares or otherwise note its records as to the restrictions on transfer set forth in this Agreement and the Plan. The certificate or certificates representing such shares shall be delivered by the Escrow Agent to The Employee only after the shares become vested on the date specified in paragraph 3 and after all other terms and conditions in this Agreement have been satisfied. 3. Vesting of Shares. The Restricted Shares awarded by this Agreement shall become vested as follows: Effective as of the date hereof (the "Grant Date"), the Restricted Shares shall be 0% vested. If the Employee is employed for a continuous period beginning on the date hereof and ending on the third anniversary of the Grant Date, 50% of the Restricted Shares shall become vested. If the Employee shall continue to be employed for a continuous period ending on the fourth anniversary of the Grant Date, an additional 50% of the Restricted Shares shall become vested, so that at such time all of the Restricted Shares subject to this Agreement shall be then vested. Notwithstanding the foregoing, in the event of the Employee's Retirement after the second anniversary of the Grant Date, 100% of the Restricted Shares shall be then vested. For purposes of this Agreement, Retirement shall mean a termination of employment of the Employee at any time after the Employee (i) has attained fifty (50) years of age, and (ii) has completed seven (7) years of service, as determined pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. Notwithstanding the foregoing, however, the accrual of vesting pursuant to this paragraph is contingent upon the Employee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Employee, suspend or delay the vesting of the Restricted Shares hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Employee's performance is unsatisfactory. Upon the vesting of Restricted Shares hereunder, the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 4. Change in Control. Upon the determination of the Committee that a Change in Control of the Company has occurred, or in the event of the liquidation or dissolution of the Company, the Restricted Shares shall become fully vested and the Restriction on Transfer shall be lifted, notwithstanding any other provision of this Agreement, and the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 5. Discretion of Committee. The Committee may decide, in its absolute discretion, to lift at any time the Restriction on Transfer or to accelerate the vesting of the Restricted Shares, and the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 6. Delivery of Shares to Estate of Deceased Employee. Any distribution or delivery to be made to the Employee under this Agreement shall, if the Employee is then deceased, be made to the Employee's estate in accordance with the terms of Section 7.5 of the Plan. 7. Conditions to Issuance of Shares. The Restricted Shares deliverable to the Employee may be either previously authorized but unissued shares or issued shares which have been reacquired by the Company. The Company shall not be required to issue any certificate or certificates for Restricted Shares hereunder prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any State or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any State or federal governmental agency, which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The lapse of such reasonable period of time following the date of the grant of the Restricted Shares as the Committee may establish from time to time for reasons of administrative convenience. Neither the Employee nor any person claiming under or through the Employee shall be, or have any of the rights or privileges of, a stockholder of the Company in respect of any Restricted Shares deliverable hereunder unless and until certificates representing such shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Employee or the Escrow Agent. Except as provided in paragraph 8, after such issuance, recordation and delivery, the Employee shall have all rights of a stockholder of the Company with respect to voting such Restricted Shares and receipt of dividends and distributions on such Restricted Shares. 8. Certain Adjustments to Shares. In the event that as a result of a stock dividend, stock split, reclassification, recapitalization, combination of shares or the adjustment in capital stock of the Company or otherwise, or as a result of a merger, consolidation, spin-off or other reorganization, the Company's Common Stock shall be increased, reduced or otherwise changed, and by virtue of any such change the Employee shall in his or her capacity as owner of Restricted Shares which have been awarded to him or her (the "Prior Shares") be entitled to new or additional or different shares or securities (other than rights or warrants to purchase securities), such new or additional or different shares or securities shall thereupon be considered to be Restricted Shares and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan. If the Employee receives rights or warrants with respect to any Prior Shares, such rights or warrants may be held or exercised by the Employee, provided that until such exercise any such rights or warrants and after such exercise any shares or other securities acquired by the exercise of such rights or warrants shall be considered to be Restricted Shares and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan. The Committee in its absolute discretion at any time may lift the Restriction on Transfer of all or any portion of such new or additional shares of stock or securities, rights or warrants to purchase securities or shares or other securities acquired by the exercise of such rights or warrants. 9. Contribution of Par Value to Capital of the Company. Notwithstanding the provisions of Section 7.2 of the Plan, the Company will contribute to the capital of the Company on behalf of the Employee, as an Award recipient, an amount equal to the par value of the Restricted Shares issued to the Employee hereunder. 10. Tax Withholding. To the extent required by applicable federal, state, local or foreign law, the Employee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the awarding or vesting of the Restricted Shares hereunder, or by reason of any election made by the Employee pursuant to Section 83(b) of the Internal Revenue Code, and no Share certificates shall be issued to the Employee unless such obligation is satisfied. 11. Plan Shall Control. This Agreement is subject to all the terms and provisions of the Plan. In the event of a conflict between any provisions of this Agreement and any provisions of the Plan, the provisions of the Plan shall govern. Terms used in this Agreement that are not defined in this Agreement shall have the meaning set forth in the Plan. 12. Powers of the Committee. The Committee shall have the power to interpret and construe the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Employee, the Employee's estate, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. 13. No Effect on Other Benefit Plans. Nothing herein contained shall affect the Employee's right to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance or other Employee welfare plan or program of the Company or any Subsidiary. 14. Nonassignability. So long as the Restriction on Transfer is in effect, the Restricted Shares herein granted and the rights and privileges conferred hereby shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation or law or otherwise) and shall not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of such award or any right or privilege conferred hereby, contrary to the provisions hereof, or upon any attempted sale under any execution, attachment or similar process upon the rights and privileges conferred hereby, such award and the rights and privileges conferred hereby shall immediately become null and void. 15. Successors and Assigns. Subject to the limitation on the transferability of the Restricted Shares contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successor and assigns of the Employee and the Company. 16. Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 101 Montgomery Street, San Francisco, California 94104, or at such other address as the Company may hereafter designate in writing. Any notice to be given to the Employee shall be addressed to the Employee at the address set forth beneath the Employee's signature hereto, or at such other address as the Employee may hereafter designate in writing. Any such notice shall be deemed to have been duly given if and when enclosed in a properly sealed envelope, addressed as aforesaid, registered or certified and deposited, postage and registry fee prepaid, in a United States post office. 17. Severability. In the event that any provision of this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement. 18. Governing Law. This Agreement shall be construed in accordance with the laws of the State of California. EX-10 7 EXHIBIT 10.172 Exhibit 10.172 THE CHARLES SCHWAB CORPORATION 1992 STOCK INCENTIVE PLAN NONSTATUTORY STOCK OPTION AGREEMENT THIS AGREEMENT is entered into as of ______________________ between THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and ______ (the "Optionee"). W I T N E S S E T H: WHEREAS, the Board has adopted and the stockholders of the Company have approved The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended (the "Plan") in order to provide selected Key Employees and Non-Employee Directors with an opportunity to acquire Common Shares; and WHEREAS, the Committee has determined that the Optionee is a Key Employee and that it would be in the best interests of the Company and its stockholders to grant the stock option described in this Agreement (the "Option") to the Optionee as an inducement to enter into or remain in the service of the Company or its subsidiaries and as an incentive for extraordinary efforts during such service: NOW, THEREFORE, the Optionee and the Company agree to the provisions set forth in this Agreement. The Optionee signifies agreement with all of the terms and conditions of this Agreement by failing to provide written objection to the Company to any of the terms hereunder within 30 days of receipt of this Agreement, and in any event by exercising an Option granted hereunder. SECTION 1. GRANT OF OPTION. (a) Option. On the terms and conditions stated below, the Company hereby grants to the Optionee the option to purchase _____ Common Shares for the amount of $_____ per Common Share (the "Exercise Price"), which is agreed to be 100% of the Fair Market Value thereof on the Date of Grant. The number of Common Shares subject to this Option and the Exercise Price shall be subject to adjustment under certain limited circumstances as provided in Article 10 of the Plan. (b) 1992 Stock Incentive Plan. This Option is granted pursuant to the Plan, the provisions of which are incorporated into this Agreement by reference, and a copy of which is available upon request at no charge to the Optionee from the Company. In the event of any inconsistency between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall prevail. (c) Tax Treatment. This Option is not intended to qualify as an incentive stock option described in Section 422(b) of the Code. (d) Expiration Date. Notwithstanding any other provision contained herein, this Option shall expire not later than the date immediately preceding the tenth anniversary of the Date of Grant. SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION. Except as otherwise provided in this Agreement or as permitted by the Plan, this Option, and any interest therein, shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. SECTION 3. RIGHT TO EXERCISE OPTION. (a) Vesting. This Option shall become exercisable by the Optionee with respect to the total number of Common Shares subject to this Option as set forth under Section 1(a) above (the "Total Award Common Shares"), subject to the continued employment of the Optionee by the Company or its subsidiaries on each date either set forth below, and subject to the provisions of Section 3(e) hereof, in annual increments of the Total Award Common Shares beginning on the first anniversary of the Date of Grant, such that (i) no portion of this Option will be exercisable prior to such first anniversary of the Date of Grant; (ii) upon and after such first anniversary of the Date of Grant, the Optionee may purchase up to twenty-five percent (25%) of the Total Award Common Shares, provided the optionee has been continually employed by the Company or its subsidiaries since the date of grant; (iii) upon and after the second, third and fourth anniversaries of the Date of Grant, respectively, the Optionee may purchase an additional twenty-five percent (25%) of the Total Award Common Shares, provided in each case that the Optionee has been continually employed by the Company or its subsidiaries since the Date of Grant. (b) Minimum Number of Shares. This Option shall be exercisable for at least 100 Common Shares (without regard to adjustments to the number of Common Shares subject to this Option pursuant to Article 10 of the Plan) or, if less, (i) the number of shares with respect to which this Option has become vested under Section 3(a) above, or (ii) all of the remaining Common Shares subject to this Option. (c) Full Vesting on Change in Control. Notwithstanding subparagraph (a) hereof, this Option shall become fully exercisable as to the Total Award Common Shares immediately preceding any Change in Control with respect to the Company. In the event that the Committee determines that a Change in Control is likely to occur, the Company shall so advise the Optionee, and the provisions of this subparagraph (c) shall take effect as of the date ten (10) days prior to the anticipated date of such Change in Control. (d) Accelerated Vesting on Retirement in Certain Cases. Notwithstanding subparagraph (a) hereof, if the Optionee terminates employment with the Company and its subsidiaries on account of Retirement, all options granted hereunder shall become fully exerciseable, but only if such retirement occurs at least two (2) years after the date of grant. (e) Vesting Contingent on Satisfactory Performance. Notwithstanding subparagraph (a) hereof, the continued accrual of vesting pursuant to subparagraph (a) is contingent upon the Optionee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Optionee suspend or delay the vesting of Options hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Optionee's performance is unsatisfactory. SECTION 4. EXERCISE OF OPTION. (a) Notice of Exercise. The Optionee or the Optionee's representative may exercise this Option by giving written notice to the Company (or its designee) pursuant to Section 9(d). The notice shall specify the election to exercise this Option, the date of exercise, the number of Common Shares for which it is being exercised and the form of payment. The notice shall be signed by the person or persons exercising this Option. In the event that this Option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof satisfactory to the Company of the representative's right to exercise this Option. The Purchase Price for Common Shares shall be paid in a form that conforms to Sections 6.1 through 6.3 of the Plan at the time such notice is given. (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued a certificate or certificates for the Common Shares so purchased, registered in the name of the person exercising this Option. The Company shall cause such certificate or certificates to be delivered to or upon the order of the person exercising this Option. SECTION 5. TERM. (a) Basic Term. This Option shall in any event expire on the date specified in Section 1(d). (b) Termination of Employment. Subject only to the provisions of Section 3(d), upon the Optionee's termination of employment with the Company and its subsidiaries for any reason, whether as a result of death, Permanent Disability or any other involuntary or voluntary event of termination of employment (including a termination of employment as may be provided for or determined under an employment contract, if any, entered into between the Company or its subsidiary and the Optionee) (each, a "Termination Event"), no unvested portion of the Total Award Common Shares thereafter shall vest or become exercisable. With respect to the vested or exercisable portion of the Total Award Common Shares as of the date of such a Termination Event, this Option shall expire on the earlier of (i) the expiration date specified in Section 1(d) or (ii) whichever of the following is applicable: (A) in the case of a Termination Event resulting from death or Permanent Disability, the date one year following such Termination Event; (B) in the case of a Termination Event resulting from Retirement, the date two years following such Termination Event; or (C) in all other cases, the date three (3) months following such Termination Event. (c) Divestment of Options. Notwithstanding anything to the contrary contained herein, this Option shall immediately become forfeited and expire in the event that the Company terminates the Optionee's employment on account of conduct inimical to the best interests of the Company, including, without limitation, conduct constituting a violation of law or Company policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether the Optionee's employment has been terminated on account of conduct inimical to the best interests of the Company shall be made by the Company in its sole discretion. SECTION 6. LEGALITY OF INITIAL ISSUANCE. No Common Shares shall be issued upon the exercise of this Option unless and until the Company has determined that: (a) A registration statement for the Common Shares is effective under the Securities Act or an exemption from the registration requirements thereof has been perfected; (b) Any applicable listing requirement of any stock exchange on which Common Shares are listed has been satisfied; and (c) Any other applicable provisions of state or federal law have been satisfied. SECTION 7. NO REGISTRATION RIGHTS. The Company may, but shall not be obligated to, register or qualify the Common Shares for resale or other disposition by the Optionee under the Securities Act or any other applicable law. SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES. (a) Restrictions. Regardless of whether the offering and sale of Common Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of such Common Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state or any other law. (b) Investment Intent at Exercise. If the Common Shares under the Plan are not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Common Shares being acquired upon exercising this Option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. (c) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 8 shall be conclusive and binding on the Optionee and all other persons. SECTION 9. MISCELLANEOUS PROVISIONS. (a) Withholding Taxes. To the extent required by applicable federal, state, local or foreign law, the Optionee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the exercise of an Option hereunder, and no Option may be exercised unless such obligation is satisfied. (b) Rights as a Stockholder. Neither the Optionee nor the Optionee's representative shall have any rights as a stockholder with respect to any Common Shares subject to this Option until certificates for such Common Shares have been issued in the name of the Optionee or the Optionee's representative. (c) No Employment Rights. Nothing in this Agreement shall be construed as giving the Optionee the right to be retained as an employee of the Company or its subsidiaries. The Company reserves the right to terminate the Optionee's employment at any time for any reason, subject only to the terms of any written employment contract entered into between the Company and the Optionee. (d) Notice. Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the appropriate postal service, by registered or certified mail with postage and fees prepaid and addressed to the party entitled to such notice at the address shown below such party's signature on this Agreement, or at such other address as such party may designate by ten (10) days advance written notice to the other party to this Agreement. Notwithstanding the foregoing, no notice of exercise, as required by Section 4(a), shall be effective until actual receipt thereof by the Company or its designee. (e) Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof; provided, however, that in the event of any inconsistency or conflict between any provision hereof and the terms of the Plan, the terms of the Plan shall control. (f) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. SECTION 10. DEFINITIONS. (a) Capitalized terms defined in the Plan shall have the same meaning when used in this Agreement. (b) "Change in Control" shall mean the occurrence of any of the following events after the effective date of the Plan as set out in Section 15.1 of the Plan: (1) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (2) A change in the composition of the Company's Board of Directors (the "Board"), as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; (3) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. (c) "Common Share" shall mean one share of the common stock of the Company. (d) "Date of Grant" shall mean the date of this Agreement, which is the date first written above. (e) "Fair Market Value" shall mean the market price of a Common Share, determined by the Committee as follows: (1) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (2) If the Common Share was traded over-the-counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (3) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (4) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. (f) "Permanent Disability" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than twelve (12) months or which can be expected to result in death. (g) "Purchase Price" shall mean the Exercise Price multiplied by the number of Common Shares with respect to which this Option is being exercised. (h) "Retirement" shall mean a termination of employment of the Optionee occurring at any time after the Optionee (i) has attained fifty (50) years of age, and (ii) completed seven (7) years of service, as determined pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. (i) "Securities Act" shall mean the Securities Act of 1933, as amended. EX-10 8 EXHIBIT 10.173 Exhibit 10.173 THE CHARLES SCHWAB CORPORATION 1992 STOCK INCENTIVE PLAN NONSTATUTORY STOCK OPTION AND PERFORMANCE UNIT AGREEMENT THIS AGREEMENT is entered into as of ______________________ between THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and _______ (the "Optionee"). W I T N E S S E T H: WHEREAS, the Board has adopted and the stockholders of the Company have approved The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended (the "Plan") in order to provide selected Key Employees and Non-Employee Directors with an opportunity to acquire Common Shares; and WHEREAS, the Committee has determined that the Optionee is a Key Employee and that it would be in the best interests of the Company and its stockholders to grant the stock option described in this Agreement (the "Option") and the Performance Units described in this Agreement (the "Performance Units") to the Optionee as an inducement to enter into or remain in the service of the Company or its subsidiaries and as an incentive for extraordinary efforts during such service: NOW, THEREFORE, the Optionee and the Company agree to the provisions set forth in this Agreement. The Optionee signifies agreement with all of the terms and conditions of this Agreement by failing to provide written objection to the Company to any of the terms hereunder within 30 days of receipt of this Agreement, and in any event by exercising an Option or a Performance Unit granted hereunder. SECTION 1. GRANT OF OPTION AND PERFORMANCE UNITS. (a) Option. On the terms and conditions stated below, the Company hereby grants to the Optionee the option to purchase _____ Common Shares for the amount of $_____ per Common Share (the "Exercise Price"), which is agreed to be 100% of the Fair Market Value thereof on the Date of Grant. The number of Common Shares subject to this Option and the Exercise Price shall be subject to adjustment under certain limited circumstances as provided in Article 10 of the Plan. (b) Performance Units. On the terms and conditions stated below, the Company hereby grants to the Optionee ___ Performance Units, as defined herein. Each Performance Unit shall entitle the Optionee to a cash payment, equal to the Net Performance Unit Value, determined as of the most recent valuation. Net Performance Unit Value shall be determined on an annual basis (or at more frequent intervals as the Company may determine from time to time in its sole discretion), and shall be communicated to the Optionee within a reasonable time following the determination of such value. (c) Tandem Issuance of Option and Performance Units. Each Performance Unit shall be issued in tandem with an Option to acquire one share hereunder, so that the exercise of a Performance Unit will result in the cancellation of the Option associated with such Performance Unit, and the exercise of an Option will result in the cancellation of the Performance Unit associated with such Option. Performance Units will expire on the date three (3) months following the fifth anniversary of the date the Performance Unit was granted. Upon the expiration of a Performance Unit, the Option associated with such Performance Unit shall remain exercisable until such Option otherwise expires pursuant to the terms of this Agreement. (d) 1992 Stock Incentive Plan. This Option is granted pursuant to the Plan, the provisions of which are incorporated into this Agreement by reference, and a copy of which is available upon request at no charge to the Optionee from the Company. In the event of any inconsistency between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall prevail. (e) Tax Treatment. This Option is not intended to qualify as an incentive stock option described in Section 422(b) of the Code. (f) Expiration Date. Notwithstanding any other provision contained herein, this Option shall expire not later than the date immediately preceding the tenth anniversary of the Date of Grant. SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION. Except as otherwise provided in this Agreement or as permitted by the Plan, this Option, and any interest therein, shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. SECTION 3. RIGHT TO EXERCISE OPTION AND PERFORMANCE UNITS. (a) Vesting. This Option shall become exercisable by the Optionee with respect to the total number of Common Shares subject to this Option as set forth under Section 1(a) above (the "Total Award Common Shares"), subject to the continued employment of the Optionee by the Company or its subsidiaries on each date either set forth below, and subject to the provisions of Section 3(e) hereof, in annual increments of the Total Award Common Shares beginning on the first anniversary of the Date of Grant, such that (i) no portion of this Option will be exercisable prior to such first anniversary of the Date of Grant; (ii) upon and after such first anniversary of the Date of Grant, the Optionee may purchase up to twenty-five percent (25%) of the Total Award Common Shares, provided the optionee has been continually employed by the Company or its subsidiaries since the date of grant; (iii) upon and after the second, third and fourth anniversaries of the Date of Grant, respectively, the Optionee may purchase an additional twenty-five percent (25%) of the Total Award Common Shares, provided in each case that the Optionee has been continually employed by the Company or its subsidiaries since the Date of Grant. (b) Minimum Number of Shares and Performance Units. This Option shall be exercisable for at least 100 Common Shares (without regard to adjustments to the number of Common Shares subject to this Option pursuant to Article 10 of the Plan) or, if less, (i) the number of shares with respect to which this Option has become vested under Section 3(a) above, or (ii) all of the remaining Common Shares subject to this Option. Performance Units shall be exercisable in minimum increments of 100 or, if less, (i) the number of Performance Units which have become vested under Section 3(a) above or (ii) all of the remaining Performance Units granted hereunder. (c) Full Vesting on Change in Control. Notwithstanding subparagraph (a) hereof, this Option shall become fully exercisable as to the Total Award Common Shares, and all Performance Units granted hereunder shall become fully exercisable, immediately preceding any Change in Control with respect to the Company. In the event that the Committee determines that a Change in Control is likely to occur, the Company shall so advise the Optionee, and the provisions of this subparagraph (c) shall take effect as of the date ten (10) days prior to the anticipated date of such Change in Control. (d) Accelerated Vesting on Retirement in Certain Cases. Notwithstanding subparagraph (a) hereof, if the Optionee terminates employment with the Company and its subsidiaries on account of Retirement, all options and Performance Units granted hereunder shall become fully exerciseable, but only if such retirement occurs at least two (2) years after the date of grant. (e) Vesting Contingent on Satisfactory Performance. Notwithstanding subparagraph (a) hereof, the continued accrual of vesting pursuant to subparagraph (a) is contingent upon the Optionee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Optionee suspend or delay the vesting of Options and Performance Shares hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Optionee's performance is unsatisfactory. SECTION 4. EXERCISE OF OPTION AND PERFORMANCE UNITS. (a) Notice of Exercise. The Optionee or the Optionee's representative may exercise this Option or any Performance Units by giving written notice to the Company or its designee pursuant to Section 9(d). The notice shall specify the election to exercise this Option and/or Performance Units (as the case may be), the date of exercise, the number of Common Shares for which the Option is being exercised, the number of Performance Units being exercised, and the form of payment (if this Option is being exercised). The notice shall be signed by the person or persons exercising this Option or Performance Units. In the event that this Option or Performance Units are being exercised by the representative of the Optionee, the notice shall be accompanied by proof satisfactory to the Company of the representative's right to exercise this Option. The Purchase Price for Common Shares shall be paid in a form that conforms to Sections 6.1 through 6.3 of the Plan at the time such notice is given. (b) Issuance of Shares. After receiving a proper notice of exercise of an Option, the Company shall cause to be issued a certificate or certificates for the Common Shares so purchased, registered in the name of the person exercising this Option. The Company shall cause such certificate or certificates to be delivered to or upon the order of the person exercising this Option. (c)Exercise of Performance Unit. After receiving a proper notice of exercise of Performance Units, the Company shall cause to be paid to the Optionee, within one month of exercise, an amount equal to the Net Performance Unit Value for each Performance Unit so exercised, less any applicable tax withholdings. SECTION 5. TERM. (a) Basic Term. This Option shall in any event expire on the date specified in Section 1(f). (b) Termination of Employment. Subject only to the provisions of Section 3(d), upon the Optionee's termination of employment with the Company and its subsidiaries for any reason, whether as a result of death, Permanent Disability or any other involuntary or voluntary event of termination of employment (including a termination of employment as may be provided for or determined under an employment contract, if any, entered into between the Company or its subsidiary and the Optionee) (each, a "Termination Event"), no unvested portion of the Total Award Common Shares or Performance Units thereafter shall vest or become exercisable. With respect to the vested or exercisable portion of the Total Award Common Shares or Performance Units as of the date of such a Termination Event, this Option shall expire on the earlier of (i) the expiration date specified in Section 1(f) or (ii) whichever of the following is applicable: (A) in the case of a Termination Event resulting from death or Permanent Disability, the date one year following such Termination Event; (B) in the case of a Termination Event resulting from Retirement, the date two years following such Termination Event; or (C) in all other cases, the date three (3) months following such Termination Event. (c) Divestment of Options. Notwithstanding anything to the contrary contained herein, this Option and all Performance Units shall immediately become forfeited and expire in the event that the Company terminates the Optionee's employment on account of conduct inimical to the best interests of the Company, including, without limitation, conduct constituting a violation of law or Company policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether the Optionee's employment has been terminated on account of conduct inimical to the best interests of the Company shall be made by the Company in its sole discretion. SECTION 6. LEGALITY OF INITIAL ISSUANCE. No Common Shares shall be issued upon the exercise of this Option unless and until the Company has determined that: (a) A registration statement for the Common Shares is effective under the Securities Act or an exemption from the registration requirements thereof has been perfected; (b) Any applicable listing requirement of any stock exchange on which Common Shares are listed has been satisfied; and (c) Any other applicable provisions of state or federal law have been satisfied. SECTION 7. NO REGISTRATION RIGHTS. The Company may, but shall not be obligated to, register or qualify the Common Shares for resale or other disposition by the Optionee under the Securities Act or any other applicable law. SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES. (a) Restrictions. Regardless of whether the offering and sale of Common Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of such Common Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state or any other law. (b) Investment Intent at Exercise. If the Common Shares under the Plan are not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Common Shares being acquired upon exercising this Option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. (c) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 8 shall be conclusive and binding on the Optionee and all other persons. SECTION 9. MISCELLANEOUS PROVISIONS (a) Withholding Taxes. To the extent required by applicable federal, state, local or foreign law, the Optionee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the exercise of an Option hereunder, and no Option may be exercised unless such obligation is satisfied. (b) Rights as a Stockholder. Neither the Optionee nor the Optionee's representative shall have any rights as a stockholder with respect to any Common Shares subject to this Option until certificates for such Common Shares have been issued in the name of the Optionee or the Optionee's representative. (c) No Employment Rights. Nothing in this Agreement shall be construed as giving the Optionee the right to be retained as an employee of the Company or its subsidiaries. The Company reserves the right to terminate the Optionee's employment at any time for any reason, subject only to the terms of any written employment contract entered into between the Company and the Optionee. (d) Notice. Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the appropriate postal service, by registered or certified mail with postage and fees prepaid and addressed to the party entitled to such notice at the address shown below such party's signature on this Agreement, or at such other address as such party may designate by ten (10) days advance written notice to the other party to this Agreement. Notwithstanding the foregoing, no notice of exercise, as required by Section 4(a), shall be effective until actual receipt thereof by the Company or its designee. (e) Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof; provided, however, that in the event of any inconsistency or conflict between any provision hereof and the terms of the Plan, the terms of the Plan shall control. (f) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. SECTION 10. DEFINITIONS. (a) Capitalized terms defined in the Plan shall have the same meaning when used in this Agreement. (b) "Change in Control" shall mean the occurrence of any of the following events after the effective date of the Plan as set out in Section 15.1 of the Plan: (1) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (2) A change in the composition of the Company's Board of Directors (the "Board"), as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; and (3) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. (c) "Common Share" shall mean one share of the common stock of the Company. (d) "Date of Grant" shall mean the date of this Agreement, which is the date first written above. (e) "Fair Market Value" shall mean the market price of a Common Share, determined by the Committee as follows: (1) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (2) If the Common Share was traded over-the-counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (3) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (4) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. (f) "Net Performance Unit Value" shall mean the difference between the Performance Unit Value and the Cost Basis, determined as follows: (1) Performance Unit Value shall mean (A) the difference between the After Tax Net Income and the Targeted Return on Stockholders' Equity, multiplied by (B) the Grant Funding Rate; (2) Cost Basis shall mean the Performance Unit Value as of the end of the fiscal quarter immediately preceding the Date of Grant; (3) After Tax Net Income shall mean the cumulative after tax net income (determined without reduction for accrued obligations pursuant to Performance Units), as measured from January 1 of the year of the Date of Grant, and otherwise subject to such adjustments as may be determined by the Company in its sole discretion; (4) Targeted Return on Stockholders' Equity shall mean a cumulative 20% annual targeted level of return on stockholders' equity, measured from January 1 of the year of the Date of Grant. Targeted Return on Stockholders' Equity is increased on a quarterly basis during the term of the Performance Unit by adding to the prior quarter's Targeted Return on Stockholders' Equity an amount equal to 5% of the ending actual consolidated stockholder's equity balance (determined as of the end of the preceding fiscal year); and (5) Grant Funding Rate shall mean a percentage, determined from time to time by the Company, to provide a level of funding for the Plan. While the Company generally intends that the Grant Funding Rate will remain fixed for the five year term of each Performance Unit, the Company reserves the right, within its sole discretion, to change the Grant Funding Rate at any time. (g) "Permanent Disability" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than twelve (12) months or which can be expected to result in death. (h) "Purchase Price" shall mean the Exercise Price multiplied by the number of Common Shares with respect to which this Option is being exercised. (i) "Retirement" shall mean a termination of employment of the Optionee occurring at any time after the Optionee (i) has attained fifty (50) years of age, and (ii) completed seven (7) years of service, as determined pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. (j) "Securities Act" shall mean the Securities Act of 1933, as amended. EX-10 9 EXHIBIT 10.174 Exhibit 10.174 THE CHARLES SCHWAB CORPORATION 1992 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT is entered into as of _____________________ between THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and ___________ (the "Optionee"). W I T N E S S E T H: WHEREAS, the Board has adopted and the stockholders of the Company have approved The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended (the "Plan") in order to provide selected Key Employees and Non-Employee Directors with an opportunity to acquire Common Shares; and WHEREAS, the Committee has determined that the Optionee is a Key Employee and that it would be in the best interests of the Company and its stockholders to grant the stock option described in this Agreement (the "Option") to the Optionee as an inducement to enter into or remain in the service of the Company or its subsidiaries and as an incentive for extraordinary efforts during such service: NOW, THEREFORE, the Optionee and the Company agree to the provisions set forth in this Agreement. The Optionee signifies agreement with all of the terms and conditions of this Agreement by failing to provide written objection to the Company to any of the terms hereunder within 30 days of receipt of this Agreement, and in any event by exercising an Option granted hereunder. SECTION 1. GRANT OF OPTION. (a) Option. On the terms and conditions stated below, the Company hereby grants to the Optionee the option to purchase _____ Common Shares for the amount of $_____ per Common Share (the "Exercise Price"), which is agreed to be 100% of the Fair Market Value thereof on the Date of Grant. The number of Common Shares subject to this Option and the Exercise Price shall be subject to adjustment under certain limited circumstances as provided in Article 10 of the Plan. (b) 1992 Stock Incentive Plan. This Option is granted pursuant to the Plan, the provisions of which are incorporated into this Agreement by reference, and a copy of which is available upon request at no charge to the Optionee from the Company. In the event of any inconsistency between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall prevail. (c) Tax Treatment. This Option is intended to qualify as an incentive stock option described in Section 422(b) of the Code. (d) Expiration Date. Notwithstanding any other provision contained herein, this Option shall expire not later than the date immediately preceding the tenth anniversary of the Date of Grant. SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION. Except as otherwise provided in this Agreement or as permitted by the Plan, this Option, and any interest therein, shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. SECTION 3. RIGHT TO EXERCISE OPTION. (a) Vesting. This Option shall become exercisable by the Optionee with respect to the total number of Common Shares subject to this Option as set forth under Section 1(a) above (the "Total Award Common Shares"), subject to the continued employment of the Optionee by the Company or its subsidiaries on each date either set forth below, and subject to the provisions of Section 3(e) hereof, in annual increments of the Total Award Common Shares beginning on the first anniversary of the Date of Grant, such that (i) no portion of this Option will be exercisable prior to such first anniversary of the Date of Grant; (ii) upon and after such first anniversary of the Date of Grant, the Optionee may purchase up to twenty-five percent (25%) of the Total Award Common Shares, provided the optionee has been continually employed by the Company or its subsidiaries since the date of grant; (iii) upon and after the second, third and fourth anniversaries of the Date of Grant, respectively, the Optionee may purchase an additional twenty-five percent (25%) of the Total Award Common Shares, provided in each case that the Optionee has been continually employed by the Company or its subsidiaries since the Date of Grant. (b) Minimum Number of Shares. This Option shall be exercisable for at least 100 Common Shares (without regard to adjustments to the number of Common Shares subject to this Option pursuant to Article 10 of the Plan) or, if less, (i) the number of shares with respect to which this Option has become vested under Section 3(a) above, or (ii) all of the remaining Common Shares subject to this Option. (c) Full Vesting on Change in Control. Notwithstanding subparagraph (a) hereof, this Option shall become fully exercisable as to the Total Award Common Shares immediately preceding any Change in Control with respect to the Company. In the event that the Committee determines that a Change in Control is likely to occur, the Company shall so advise the Optionee, and the provisions of this subparagraph (c) shall take effect as of the date ten (10) days prior to the anticipated date of such Change in Control. (d) Accelerated Vesting on Retirement in Certain Cases. Notwithstanding subparagraph (a) hereof, if the Optionee terminates employment with the Company and its subsidiaries on account of Retirement, all options granted hereunder shall become fully exerciseable, but only if such retirement occurs at least two (2) years after the date of grant. (e) Vesting Contingent on Satisfactory Performance. Notwithstanding subparagraph (a) hereof, the continued accrual of vesting pursuant to subparagraph (a) is contingent upon the Optionee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Optionee suspend or delay the vesting of Options hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Optionee's performance is unsatisfactory. SECTION 4. EXERCISE OF OPTION. (a) Notice of Exercise. The Optionee or the Optionee's representative may exercise this Option by giving written notice to the Company (or its designee) pursuant to Section 9(d). The notice shall specify the election to exercise this Option, the date of exercise, the number of Common Shares for which it is being exercised and the form of payment. The notice shall be signed by the person or persons exercising this Option. In the event that this Option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof satisfactory to the Company of the representative's right to exercise this Option. The Purchase Price for Common Shares shall be paid in a form that conforms to Sections 6.1 through 6.3 of the Plan at the time such notice is given. (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued a certificate or certificates for the Common Shares so purchased, registered in the name of the person exercising this Option. The Company shall cause such certificate or certificates to be delivered to or upon the order of the person exercising this Option. SECTION 5. TERM. (a) Basic Term. This Option shall in any event expire on the date specified in Section 1(d). (b) Termination of Employment. Subject only to the provisions of Section 3(d), upon the Optionee's termination of employment with the Company and its subsidiaries for any reason, whether as a result of death, Permanent Disability or any other involuntary or voluntary event of termination of employment (including a termination of employment as may be provided for or determined under an employment contract, if any, entered into between the Company or its subsidiary and the Optionee) (each, a "Termination Event"), no unvested portion of the Total Award Common Shares thereafter shall vest or become exercisable. With respect to the vested or exercisable portion of the Total Award Common Shares as of the date of such a Termination Event, this Option shall expire on the earlier of (i) the expiration date specified in Section 1(d) or (ii) whichever of the following is applicable: (A) in the case of a Termination Event resulting from death or Permanent Disability, the date one year following such Termination Event; or (B) in all other cases, the date three (3) months following such Termination Event. (c) Divestment of Options. Notwithstanding anything to the contrary contained herein, this Option shall immediately become forfeited and expire in the event that the Company terminates the Optionee's employment on account of conduct inimical to the best interests of the Company, including, without limitation, conduct constituting a violation of law or Company policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether the Optionee's employment has been terminated on account of conduct inimical to the best interests of the Company shall be made by the Company in its sole discretion. SECTION 6. LEGALITY OF INITIAL ISSUANCE. No Common Shares shall be issued upon the exercise of this Option unless and until the Company has determined that: (a) A registration statement for the Common Shares is effective under the Securities Act or an exemption from the registration requirements thereof has been perfected; (b) Any applicable listing requirement of any stock exchange on which Common Shares are listed has been satisfied; and (c) Any other applicable provisions of state or federal law have been satisfied. SECTION 7. NO REGISTRATION RIGHTS. The Company may, but shall not be obligated to, register or qualify the Common Shares for resale or other disposition by the Optionee under the Securities Act or any other applicable law. SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES. (a) Restrictions. Regardless of whether the offering and sale of Common Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of such Common Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state or any other law. (b) Investment Intent at Exercise. If the Common Shares under the Plan are not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Common Shares being acquired upon exercising this Option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. (c) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 8 shall be conclusive and binding on the Optionee and all other persons. SECTION 9. MISCELLANEOUS PROVISIONS. (a) Withholding Taxes. To the extent required by applicable federal, state, local or foreign law the Optionee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the exercise of an Option hereunder and no Option may be exercised unless such obligation is satisfied. (b) Rights as a Stockholder. Neither the Optionee nor the Optionee's representative shall have any rights as a stockholder with respect to any Common Shares subject to this Option until certificates for such Common Shares have been issued in the name of the Optionee or the Optionee's representative. (c) No Employment Rights. Nothing in this Agreement shall be construed as giving the Optionee the right to be retained as an employee of the Company or its subsidiaries. The Company reserves the right to terminate the Optionee's employment at any time for any reason, subject only to the terms of any written employment contract entered into between the Company and the Optionee. (d) Notice. Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the appropriate postal service, by registered or certified mail with postage and fees prepaid and addressed to the party entitled to such notice at the address shown below such party's signature on this Agreement, or at such other address as such party may designate by ten (10) days advance written notice to the other party to this Agreement. Notwithstanding the foregoing, no notice of exercise, as required by Section 4(a), shall be effective until actual receipt thereof by the Company or its designee. (e) Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof; provided, however, that in the event of any inconsistency or conflict between any provision hereof and the terms of the Plan, the terms of the Plan shall control. (f) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. SECTION 10. DEFINITIONS. (a) Capitalized terms defined in the Plan shall have the same meaning when used in this Agreement. (b) "Change in Control" shall mean the occurrence of any of the following events after the effective date of the Plan as set out in Section 15.1 of the Plan: (1) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (2) A change in the composition of the Company's Board of Directors (the "Board"), as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; (3) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. (c) "Common Share" shall mean one share of the common stock of the Company. (d) "Date of Grant" shall mean the date of this Agreement, which is the date first written above. (e) "Fair Market Value" shall mean the market price of a Common Share, determined by the Committee as follows: (1) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (2) If the Common Share was traded over-the-counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (3) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (4) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. (f) "Permanent Disability" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than twelve (12) months or which can be expected to result in death. (g) "Purchase Price" shall mean the Exercise Price multiplied by the number of Common Shares with respect to which this Option is being exercised. (h) "Retirement" shall mean a termination of employment of the Optionee occurring at any time after the Optionee (i) has attained fifty (50) years of age, and (ii) completed seven (7) years of service, as determined pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. (i) "Securities Act" shall mean the Securities Act of 1933, as amended. EX-10 10 EXHIBIT 10.175 Exhibit 10.175 THE CHARLES SCHWAB CORPORATION 1992 STOCK INCENTIVE PLAN RESTRICTED SHARES AWARD AGREEMENT THIS AGREEMENT is entered into between The Charles Schwab Corporation, a Delaware corporation (the "Company") and ______ (the "Employee"). WITNESSETH: WHEREAS, the Company has adopted The Charles Schwab Corporation 1992 Stock Incentive Plan (the "Plan"), which provides for the granting of restricted shares of Common Stock of the Company ("Restricted Shares") to key employees of the Company and its Subsidiaries; and WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Committee"), which is responsible for the administration of the Plan, has authorized the granting of an award of Restricted Shares to the Employee, effective as of _______________, (the "Grant Date"); and WHEREAS, this Agreement is prepared in conjunction with and pursuant to the terms of the Plan and, although all of the terms of the Plan and the definitions used in this Plan have not been set forth herein, such terms and definitions are incorporated herein and made a part hereof by reference, and, except as otherwise expressly stated herein, the provisions of the Plan shall govern any interpretation of this Agreement; and WHEREAS, the Employee has accepted the grant of Restricted Shares and agreed to the terms and conditions hereinafter stated; NOW, THEREFORE, the Employee and the Company agree to the provisions set forth in the Agreement. The Employee signifies agreement with all of the terms and conditions of this Agreement by failing to provide written objection to the Company to any of the terms hereunder within 30 days of receipt of this Agreement, and in any event by accepting any dividends paid with respect to the Restricted Shares granted hereunder. 1. Grant of Restricted Shares. The Company hereby grants to the Employee, as a separate incentive in connection with his or her employment and not in lieu of any salary or other cash compensation for his or her services, an award of ____ Restricted Shares, effective _______________, subject to all the terms and conditions in this Agreement and the Plan. 2. Restriction on Transfer. The Restricted Shares awarded pursuant to this Agreement shall be issued in the name of The Employee and held by the Secretary of the Company as escrow agent (the "Escrow Agent"), and shall not be sold, transferred, otherwise disposed of, pledged or otherwise hypothecated until the date such Restricted Shares become vested pursuant to paragraph 3 hereof (the "Restriction on Transfer"). The Company may instruct the transfer agent for its Common Stock to place a legend on the certificates representing the Restricted Shares or otherwise note its records as to the restrictions on transfer set forth in this Agreement and the Plan. The certificate or certificates representing such shares shall be delivered by the Escrow Agent to The Employee only after the shares become vested on the date specified in paragraph 3 and after all other terms and conditions in this Agreement have been satisfied. 3. Vesting of Shares. The Restricted Shares awarded by this Agreement shall become vested as follows: (I) Effective as of the date hereof (the "Grant Date"), the Restricted Shares shall be 50% vested. (II) 50% of the Restricted Shares shall become vested on the third anniversary of the Grant Date (the "First Vesting Date") if (A) the Employee is employed for a continuous period beginning on the Grant Date and ending on the First Vesting Date, and (B) the Compound Annual Total Shareholder Return exceeds the Market Index Total Shareholder Return by at least two percentage points for the period beginning on the Grant Date and ending on the First Vesting Date. (III) 100% of the Restricted Shares (less any shares which became vested pursuant to subparagraph (II) above) shall become vested on the fourth anniversary of the Grant Date (the "Final Vesting Date") if (A) the Employee is employed for a continuous period beginning on the Grant Date and ending on the Final Vesting Date, and (B) the Compound Annual Total Shareholder Return exceeds the Market Index Total Shareholder Return by at least two percentage points for the period beginning on the Grant Date and ending on the Final Vesting Date. (IV) Any Restricted Shares that are not vested on the Final Vesting Date will revert to the Company. (V) Notwithstanding the foregoing, in the event of the Employee's Retirement after the second anniversary of the Grant Date, 100% of the Restricted Shares shall be then vested. For purposes of this Agreement, Retirement shall mean a termination of employment of the Employee at any time after the Employee (i) has attained fifty (50) years of age, and (ii) has completed seven (7) years of service, as determined pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. For purposes of the foregoing, the Compound Annual Total Shareholder Return for a period shall mean the annualized compound return (consisting of both stock price appreciation and dividends, and assuming reinvestment of dividends) to shareholders of the Company, and the Market Index Total Shareholder Return for a period shall mean the average annualized compound return (consisting of both stock price appreciation and dividends, and assuming reinvestment of dividends) to shareholders of corporations comprising the Standard & Poor's 500. Notwithstanding the foregoing, however, the accrual of vesting pursuant to this paragraph is contingent upon the Employee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Employee, suspend or delay the vesting of the Restricted Shares hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Employee's performance is unsatisfactory. Upon the vesting of Restricted Shares hereunder, the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 4. Supplemental Cash Payment. In the event any Restricted Shares become vested pursuant to Section 3 above, the Employee shall be eligible to receive a Supplemental Cash Payment on the Vesting Date, in an amount calculated pursuant to the following table, equal to a multiple of the value of the Restricted Shares on the Vesting Date, based upon the number of percentage points by which the Compound Annual Total Shareholder Return exceeds the Market Index Total Shareholder Return for the period beginning on the Grant Date and ending on the Vesting Date ("Excess Annual Total Shareholder Return"), as follows: Excess Annual Total Shareholder Return Multiple Less than four percentage points 0% At least four, but less than six percentage points 25% At least six, but less than eight percentage points 50% At least eight, but less than ten percentage points 100% Ten percentage points or more 150% 5. Full Vesting on Change in Control. Upon the determination of the Committee that a Change in Control of the Company has occurred, or in the event of the liquidation or dissolution of the Company, the Restricted Shares shall become fully vested and the Restriction on Transfer shall be lifted, notwithstanding any other provision of this Agreement, and the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 6. Discretion of Committee. The Committee may decide, in its absolute discretion, to lift at any time the Restriction on Transfer or to accelerate the vesting of the Restricted Shares, and the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 7. Delivery of Shares to Estate of Deceased Employee. Any distribution or delivery to be made to the Employee under this Agreement shall, if the Employee is then deceased, be made to the Employee's estate in accordance with the terms of Section 7.5 of the Plan. 8. Conditions to Issuance of Shares. The Restricted Shares deliverable to the Employee may be either previously authorized but unissued shares or issued shares which have been reacquired by the Company. The Company shall not be required to issue any certificate or certificates for Restricted Shares hereunder prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any State or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any State or federal governmental agency, which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The lapse of such reasonable period of time following the date of the grant of the Restricted Shares as the Committee may establish from time to time for reasons of administrative convenience. Neither the Employee nor any person claiming under or through the Employee shall be, or have any of the rights or privileges of, a stockholder of the Company in respect of any Restricted Shares deliverable hereunder unless and until certificates representing such shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Employee or the Escrow Agent. Except as provided in paragraph 9, after such issuance, recordation and delivery, the Employee shall have all rights of a stockholder of the Company with respect to voting such Restricted Shares and receipt of dividends and distributions on such Restricted Shares. 9. Certain Adjustments to Shares. In the event that as a result of a stock dividend, stock split, reclassification, recapitalization, combination of shares or the adjustment in capital stock of the Company or otherwise, or as a result of a merger, consolidation, spin-off or other reorganization, the Company's Common Stock shall be increased, reduced or otherwise changed, and by virtue of any such change the Employee shall in his or her capacity as owner of Restricted Shares which have been awarded to him or her (the "Prior Shares") be entitled to new or additional or different shares or securities (other than rights or warrants to purchase securities), such new or additional or different shares or securities shall thereupon be considered to be Restricted Shares and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan. If the Employee receives rights or warrants with respect to any Prior Shares, such rights or warrants may be held or exercised by the Employee, provided that until such exercise any such rights or warrants and after such exercise any shares or other securities acquired by the exercise of such rights or warrants shall be considered to be Restricted Shares and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan. The Committee in its absolute discretion at any time may lift the Restriction on Transfer of all or any portion of such new or additional shares of stock or securities, rights or warrants to purchase securities or shares or other securities acquired by the exercise of such rights or warrants. 10. Contribution of Par Value to Capital of the Company. Notwithstanding the provisions of Section 7.2 of the Plan, the Company will contribute to the capital of the Company on behalf of the Employee, as an Award recipient, an amount equal to the par value of the Restricted Shares issued to the Employee hereunder. 11. Tax Withholding. To the extent required by applicable federal, state, local or foreign law, the Employee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the awarding or vesting of the Restricted Shares hereunder, or by reason of any election made by the Employee pursuant to Section 83(b) of the Internal Revenue Code, and no Share certificates shall be issued to the Employee unless such obligation is satisfied. 12. Plan Shall Control. This Agreement is subject to all the terms and provisions of the Plan. In the event of a conflict between any provisions of this Agreement and any provisions of the Plan, the provisions of the Plan shall govern. Terms used in this Agreement that are not defined in this Agreement shall have the meaning set forth in the Plan. 13. Powers of the Committee. The Committee shall have the power to interpret and construe the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Employee, the Employee's estate, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. 14. No Effect on Other Benefit Plans. Nothing herein contained shall affect the Employee's right to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance or other the Employee welfare plan or program of the Company or any Subsidiary. 15. Nonassignability. So long as the Restriction on Transfer is in effect, the Restricted Shares herein granted and the rights and privileges conferred hereby shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation or law or otherwise) and shall not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of such award or any right or privilege conferred hereby, contrary to the provisions hereof, or upon any attempted sale under any execution, attachment or similar process upon the rights and privileges conferred hereby, such award and the rights and privileges conferred hereby shall immediately become null and void. 16. Successors and Assigns. Subject to the limitation on the transferability of the Restricted Shares contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successor and assigns of the Employee and the Company. 17. Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 101 Montgomery Street, San Francisco, California 94104, or at such other address as the Company may hereafter designate in writing. Any notice to be given to the Employee shall be addressed to the Employee at the address set forth beneath the Employee's signature hereto, or at such other address as the Employee may hereafter designate in writing. Any such notice shall be deemed to have been duly given if and when enclosed in a properly sealed envelope, addressed as aforesaid, registered or certified and deposited, postage and registry fee prepaid, in a United States post office. 18. Severability. In the event that any provision of this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement. 19. Governing Law. This Agreement shall be construed in accordance with the laws of the State of California. EX-10 11 EXHIBIT 10.176 Exhibit 10.176 THE CHARLES SCHWAB CORPORATION 1987 STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT THIS AGREEMENT is entered into as of ______________________ between THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and _________ (the "Optionee"). W I T N E S S E T H: WHEREAS, the Board has adopted and the stockholders of the Company have approved The Charles Schwab Corporation 1987 Stock Option Plan, as amended (the "Plan") in order to provide selected Key Employees with an opportunity to acquire Common Shares; and WHEREAS, the Committee has determined that the Optionee is a Key Employee and that it would be in the best interests of the Company and its stockholders to grant the stock option described in this Agreement (the "Option") to the Optionee as an inducement to enter into or remain in the service of the Company or its subsidiaries and as an incentive for extraordinary efforts during such service: NOW, THEREFORE, the Optionee and the Company agree to the provisions set forth in this Agreement. The Optionee signifies agreement with all of the terms and conditions of this Agreement by failing to provide written objection to the Company to any of the terms hereunder within 30 days of receipt of this Agreement, and in any event by exercising an Option granted hereunder. SECTION 1. GRANT OF OPTION. (a) Option. On the terms and conditions stated below, the Company hereby grants to the Optionee the option to purchase _____ Common Shares for the amount of $24.625 per Common Share (the "Exercise Price"), which is agreed to be 100% of the Fair Market Value thereof on the Date of Grant. The number of Common Shares subject to this Option and the Exercise Price shall be subject to adjustment under certain limited circumstances as provided in Article 10 of the Plan. (b) 1987 Stock Option Plan. This Option is granted pursuant to the Plan, the provisions of which are incorporated into this Agreement by reference, and a copy of which is available upon request at no charge to the Optionee from the Company. In the event of any inconsistency between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall prevail. (c) Tax Treatment. This Option is not intended to qualify as an incentive stock option described in Section 422(b) of the Code. (d) Expiration Date. Notwithstanding any other provision contained herein, this Option shall expire not later than the date immediately preceding the tenth anniversary of the Date of Grant. SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION. Except as otherwise provided in this Agreement or as permitted by the Plan, this Option, and any interest therein, shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. SECTION 3. RIGHT TO EXERCISE OPTION. (a) Vesting. This Option shall become exercisable by the Optionee with respect to the total number of Common Shares subject to this Option as set forth under Section 1(a) above (the "Total Award Common Shares"), subject to the continued employment of the Optionee by the Company or its subsidiaries on each date either set forth below, and subject to the provisions of Section 3(e) hereof, in annual increments of the Total Award Common Shares beginning on the first anniversary of the Date of Grant, such that (i) no portion of this Option will be exercisable prior to such first anniversary of the Date of Grant; (ii) upon and after such first anniversary of the Date of Grant, the Optionee may purchase up to twenty-five percent (25%) of the Total Award Common Shares, provided the optionee has been continually employed by the Company or its subsidiaries since the date of grant; (iii) upon and after the second, third and fourth anniversaries of the Date of Grant, respectively, the Optionee may purchase an additional twenty-five percent (25%) of the Total Award Common Shares, provided in each case that the Optionee has been continually employed by the Company or its subsidiaries since the Date of Grant. (b) Minimum Number of Shares. This Option shall be exercisable for at least 100 Common Shares (without regard to adjustments to the number of Common Shares subject to this Option pursuant to Article 10 of the Plan) or, if less, (i) the number of shares with respect to which this Option has become vested under Section 3(a) above, or (ii) all of the remaining Common Shares subject to this Option. (c) Full Vesting on Change in Control. Notwithstanding subparagraph (a) hereof, this Option shall become fully exercisable as to the Total Award Common Shares immediately preceding any Change in Control with respect to the Company. In the event that the Committee determines that a Change in Control is likely to occur, the Company shall so advise the Optionee, and the provisions of this subparagraph (c) shall take effect as of the date ten (10) days prior to the anticipated date of such Change in Control. (d) Accelerated Vesting on Retirement in Certain Cases. Notwithstanding subparagraph (a) hereof, if the Optionee terminates employment with the Company and its subsidiaries on account of Retirement, all options granted hereunder shall become fully exerciseable, but only if such retirement occurs at least two (2) years after the date of grant. (e) Vesting Contingent on Satisfactory Performance. Notwithstanding subparagraph (a) hereof, the continued accrual of vesting pursuant to subparagraph (a) is contingent upon the Optionee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Optionee suspend or delay the vesting of Options hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Optionee's performance is unsatisfactory. SECTION 4. EXERCISE OF OPTION. (a) Notice of Exercise. The Optionee or the Optionee's representative may exercise this Option by giving written notice to the Company (or its designee) pursuant to Section 9(d). The notice shall specify the election to exercise this Option, the date of exercise, the number of Common Shares for which it is being exercised and the form of payment. The notice shall be signed by the person or persons exercising this Option. In the event that this Option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof satisfactory to the Company of the representative's right to exercise this Option. The Purchase Price for Common Shares shall be paid in a form that conforms to Sections 6.1 through 6.3 of the Plan at the time such notice is given. (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued a certificate or certificates for the Common Shares so purchased, registered in the name of the person exercising this Option. The Company shall cause such certificate or certificates to be delivered to or upon the order of the person exercising this Option. SECTION 5. TERM. (a) Basic Term. This Option shall in any event expire on the date specified in Section 1(d). (b) Termination of Employment. Subject only to the provisions of Section 3(d), upon the Optionee's termination of employment with the Company and its subsidiaries for any reason, whether as a result of death, Permanent Disability or any other involuntary or voluntary event of termination of employment (including a termination of employment as may be provided for or determined under an employment contract, if any, entered into between the Company or its subsidiary and the Optionee) (each, a "Termination Event"), no unvested portion of the Total Award Common Shares thereafter shall vest or become exercisable. With respect to the vested or exercisable portion of the Total Award Common Shares as of the date of such a Termination Event, this Option shall expire on the earlier of (i) the expiration date specified in Section 1(d) or (ii) whichever of the following is applicable: (A) in the case of a Termination Event resulting from death or Permanent Disability, the date one year following such Termination Event; (B) in the case of a Termination Event resulting from Retirement, the date two years following such Termination Event; or (C) in all other cases, the date three (3) months following such Termination Event. (c) Divestment of Options. Notwithstanding anything to the contrary contained herein, this Option shall immediately become forfeited and expire in the event that the Company terminates the Optionee's employment on account of conduct inimical to the best interests of the Company, including, without limitation, conduct constituting a violation of law or Company policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether the Optionee's employment has been terminated on account of conduct inimical to the best interests of the Company shall be made by the Company in its sole discretion. SECTION 6. LEGALITY OF INITIAL ISSUANCE. No Common Shares shall be issued upon the exercise of this Option unless and until the Company has determined that: (a) A registration statement for the Common Shares is effective under the Securities Act or an exemption from the registration requirements thereof has been perfected; (b) Any applicable listing requirement of any stock exchange on which Common Shares are listed has been satisfied; and (c) Any other applicable provisions of state or federal law have been satisfied. SECTION 7. NO REGISTRATION RIGHTS. The Company may, but shall not be obligated to, register or qualify the Common Shares for resale or other disposition by the Optionee under the Securities Act or any other applicable law. SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES. (a) Restrictions. Regardless of whether the offering and sale of Common Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of such Common Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state or any other law. (b) Investment Intent at Exercise. If the Common Shares under the Plan are not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Common Shares being acquired upon exercising this Option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. (c) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 8 shall be conclusive and binding on the Optionee and all other persons. SECTION 9. MISCELLANEOUS PROVISIONS. (a) Withholding Taxes. To the extent required by applicable federal, state, local or foreign law, the Optionee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the exercise of an Option hereunder, and no Option may be exercised unless such obligation is satisfied. (b) Rights as a Stockholder. Neither the Optionee nor the Optionee's representative shall have any rights as a stockholder with respect to any Common Shares subject to this Option until certificates for such Common Shares have been issued in the name of the Optionee or the Optionee's representative. (c) No Employment Rights. Nothing in this Agreement shall be construed as giving the Optionee the right to be retained as an employee of the Company or its subsidiaries. The Company reserves the right to terminate the Optionee's employment at any time for any reason, subject only to the terms of any written employment contract entered into between the Company and the Optionee. (d) Notice. Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the appropriate postal service, by registered or certified mail with postage and fees prepaid and addressed to the party entitled to such notice at the address shown below such party's signature on this Agreement, or at such other address as such party may designate by ten (10) days advance written notice to the other party to this Agreement. Notwithstanding the foregoing, no notice of exercise, as required by Section 4(a), shall be effective until actual receipt thereof by the Company or its designee. (e) Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof; provided, however, that in the event of any inconsistency or conflict between any provision hereof and the terms of the Plan, the terms of the Plan shall control. (f) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. SECTION 10. DEFINITIONS. (a) Capitalized terms defined in the Plan shall have the same meaning when used in this Agreement. (b) "Change in Control" shall mean the occurrence of any of the following events after the effective date of the Plan as set out in Section 14.1 of the Plan: (1) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (2) A change in the composition of the Company's Board of Directors (the "Board"), as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; (3) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. (c) "Common Share" shall mean one share of the common stock of the Company. (d) "Date of Grant" shall mean the date of this Agreement, which is the date first written above. (e) "Fair Market Value" shall mean the market price of a Common Share, determined by the Committee as follows: (1) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (2) If the Common Share was traded over-the counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (3) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (4) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. (f) "Permanent Disability" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than twelve (12) months or which can be expected to result in death. (g) "Purchase Price" shall mean the Exercise Price multiplied by the number of Common Shares with respect to which this Option is being exercised. (h) "Retirement" shall mean a termination of employment of the Optionee occurring at any time after the Optionee (i) has attained fifty (50) years of age, and (ii) completed seven (7) years of service, as determined pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. (i) "Securities Act" shall mean the Securities Act of 1933, as amended. EX-10 12 EXHIBIT 10.177 Exhibit 10.177 THE CHARLES SCHWAB CORPORATION 1987 STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT is entered into as of ____________________ between THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and _________ (the "Optionee"). W I T N E S S E T H: WHEREAS, the Board has adopted and the stockholders of the Company have approved The Charles Schwab Corporation 1987 Stock Option Plan, as amended (the "Plan") in order to provide selected Key Employees with an opportunity to acquire Common Shares; and WHEREAS, the Committee has determined that the Optionee is a Key Employee and that it would be in the best interests of the Company and its stockholders to grant the stock option described in this Agreement (the "Option") to the Optionee as an inducement to enter into or remain in the service of the Company or its subsidiaries and as an incentive for extraordinary efforts during such service; NOW, THEREFORE, the Optionee and the Company agree to the provisions set forth in this Agreement. The Optionee signifies agreement with all of the terms and conditions of this Agreement by failing to provide written objection to the Company to any of the terms hereunder within 30 days of receipt of this Agreement, and in any event by exercising an Option granted hereunder. SECTION 1. GRANT OF OPTION. (a) Option. On the terms and conditions stated below, the Company hereby grants to the Optionee the option to purchase _____ Common Shares for the amount of $24.625 per Common Share (the "Exercise Price"), which is agreed to be 100% of the Fair Market Value thereof on the Date of Grant. The number of Common Shares subject to this Option and the Exercise Price shall be subject to adjustment under certain limited circumstances as provided in Article 10 of the Plan. (b) 1987 Stock Option Plan. This Option is granted pursuant to the Plan, the provisions of which are incorporated into this Agreement by reference, and a copy of which is available upon request at no charge to the Optionee from the Company. In the event of any inconsistency between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall prevail. (c) Tax Treatment. This Option is intended to qualify as an incentive stock option described in Section 422(b) of the Code. (d) Expiration Date. Notwithstanding any other provision contained herein, this Option shall expire not later than the date immediately preceding the tenth anniversary of the Date of Grant. SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION. Except as otherwise provided in this Agreement or as permitted by the Plan, this Option, and any interest therein, shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. SECTION 3. RIGHT TO EXERCISE OPTION. (a) Vesting. This Option shall become exercisable by the Optionee with respect to the total number of Common Shares subject to this Option as set forth under Section 1(a) above (the "Total Award Common Shares"), subject to the continued employment of the Optionee by the Company or its subsidiaries on each date either set forth below, and subject to the provisions of Section 3(e) hereof, in annual increments of the Total Award Common Shares beginning on the first anniversary of the Date of Grant, such that (i) no portion of this Option will be exercisable prior to such first anniversary of the Date of Grant; (ii) upon and after such first anniversary of the Date of Grant, the Optionee may purchase up to twenty-five percent (25%) of the Total Award Common Shares, provided the optionee has been continually employed by the Company or its subsidiaries since the date of grant; (iii) upon and after the second, third and fourth anniversaries of the Date of Grant, respectively, the Optionee may purchase an additional twenty-five percent (25%) of the Total Award Common Shares, provided in each case that the Optionee has been continually employed by the Company or its subsidiaries since the Date of Grant. (b) Minimum Number of Shares. This Option shall be exercisable for at least 100 Common Shares (without regard to adjustments to the number of Common Shares subject to this Option pursuant to Article 10 of the Plan) or, if less, (i) the number of shares with respect to which this Option has become vested under Section 3(a) above, or (ii) all of the remaining Common Shares subject to this Option. (c) Full Vesting on Change in Control. Notwithstanding subparagraph (a) hereof, this Option shall become fully exercisable as to the Total Award Common Shares immediately preceding any Change in Control with respect to the Company. In the event that the Committee determines that a Change in Control is likely to occur, the Company shall so advise the Optionee, and the provisions of this subparagraph (c) shall take effect as of the date ten (10) days prior to the anticipated date of such Change in Control. (d) Accelerated Vesting on Retirement in Certain Cases. Notwithstanding subparagraph (a) hereof, if the Optionee terminates employment with the Company and its subsidiaries on account of Retirement, all options granted hereunder shall become fully exerciseable, but only if such retirement occurs at least two (2) years after the date of grant. (e) Vesting Contingent on Satisfactory Performance. Notwithstanding subparagraph (a) hereof, the continued accrual of vesting pursuant to subparagraph (a) is contingent upon the Optionee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Optionee suspend or delay the vesting of Options hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Optionee's performance is unsatisfactory. SECTION 4. EXERCISE OF OPTION. (a) Notice of Exercise. The Optionee or the Optionee's representative may exercise this Option by giving written notice to the Company (or its designee) pursuant to Section 9(d). The notice shall specify the election to exercise this Option, the date of exercise, the number of Common Shares for which it is being exercised and the form of payment. The notice shall be signed by the person or persons exercising this Option. In the event that this Option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof satisfactory to the Company of the representative's right to exercise this Option. The Purchase Price for Common Shares shall be paid in a form that conforms to Sections 6.1 through 6.3 of the Plan at the time such notice is given. (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued a certificate or certificates for the Common Shares so purchased, registered in the name of the person exercising this Option. The Company shall cause such certificate or certificates to be delivered to or upon the order of the person exercising this Option. SECTION 5. TERM. (a) Basic Term. This Option shall in any event expire on the date specified in Section 1(d). (b) Termination of Employment. Subject only to the provisions of Section 3(d), upon the Optionee's termination of employment with the Company and its subsidiaries for any reason, whether as a result of death, Permanent Disability or any other involuntary or voluntary event of termination of employment (including a termination of employment as may be provided for or determined under an employment contract, if any, entered into between the Company or its subsidiary and the Optionee) (each, a "Termination Event"), no unvested portion of the Total Award Common Shares thereafter shall vest or become exercisable. With respect to the vested or exercisable portion of the Total Award Common Shares as of the date of such a Termination Event, this Option shall expire on the earlier of (i) the expiration date specified in Section 1(d) or (ii) whichever of the following is applicable: (A) in the case of a Termination Event resulting from death or Permanent Disability, the date one year following such Termination Event; or (B) in all other cases, the date three (3) months following such Termination Event. (c) Divestment of Options. Notwithstanding anything to the contrary contained herein, this Option shall immediately become forfeited and expire in the event that the Company terminates the Optionee's employment on account of conduct inimical to the best interests of the Company, including, without limitation, conduct constituting a violation of law or Company policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether the Optionee's employment has been terminated on account of conduct inimical to the best interests of the Company shall be made by the Company in its sole discretion. SECTION 6. LEGALITY OF INITIAL ISSUANCE. No Common Shares shall be issued upon the exercise of this Option unless and until the Company has determined that: (a) A registration statement for the Common Shares is effective under the Securities Act or an exemption from the registration requirements thereof has been perfected; (b) Any applicable listing requirement of any stock exchange on which Common Shares are listed has been satisfied; and (c) Any other applicable provisions of state or federal law have been satisfied. SECTION 7. NO REGISTRATION RIGHTS. The Company may, but shall not be obligated to, register or qualify the Common Shares for resale or other disposition by the Optionee under the Securities Act or any other applicable law. SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES. (a) Restrictions. Regardless of whether the offering and sale of Common Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of such Common Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state or any other law. (b) Investment Intent at Exercise. If the Common Shares under the Plan are not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Common Shares being acquired upon exercising this Option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. (c) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 8 shall be conclusive and binding on the Optionee and all other persons. SECTION 9. MISCELLANEOUS PROVISIONS. (a) Withholding Taxes. To the extent required by applicable federal, state, local or foreign law the Optionee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the exercise of an Option hereunder and no Option may be exercised unless such obligation is satisfied. (b) Rights as a Stockholder. Neither the Optionee nor the Optionee's representative shall have any rights as a stockholder with respect to any Common Shares subject to this Option until certificates for such Common Shares have been issued in the name of the Optionee or the Optionee's representative. (c) No Employment Rights. Nothing in this Agreement shall be construed as giving the Optionee the right to be retained as an employee of the Company or its subsidiaries. The Company reserves the right to terminate the Optionee's employment at any time for any reason, subject only to the terms of any written employment contract entered into between the Company and the Optionee. (d) Notice. Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the appropriate postal service, by registered or certified mail with postage and fees prepaid and addressed to the party entitled to such notice at the address shown below such party's signature on this Agreement, or at such other address as such party may designate by ten (10) days advance written notice to the other party to this Agreement. Notwithstanding the foregoing, no notice of exercise, as required by Section 4(a), shall be effective until actual receipt thereof by the Company or its designee. (e) Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof; provided, however, that in the event of any inconsistency or conflict between any provision hereof and the terms of the Plan, the terms of the Plan shall control. (f) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. SECTION 10. DEFINITIONS. (a) Capitalized terms defined in the Plan shall have the same meaning when used in this Agreement. (b) "Change in Control" shall mean the occurrence of any of the following events after the effective date of the Plan as set out in Section 14.1 of the Plan: (1) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (2) A change in the composition of the Company's Board of Directors (the "Board"), as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; (3) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. (c) "Common Share" shall mean one share of the common stock of the Company. (d) "Date of Grant" shall mean the date of this Agreement, which is the date first written above. (e) "Fair Market Value" shall mean the market price of a Common Share, determined by the Committee as follows: (1) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (2) If the Common Share was traded over-the- counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (3) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (4) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. (f) "Permanent Disability" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than twelve (12) months or which can be expected to result in death. (g) "Purchase Price" shall mean the Exercise Price multiplied by the number of Common Shares with respect to which this Option is being exercised. (h) "Retirement" shall mean a termination of employment of the Optionee occurring at any time after the Optionee (i) has attained fifty (50) years of age, and (ii) completed seven (7) years of service, as determined pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. (i) "Securities Act" shall mean the Securities Act of 1933, as amended. EX-10 13 EXHIBIT 10.178 Exhibit 10.178 THE CHARLES SCHWAB CORPORATION 1987 STOCK OPTION PLAN RESTRICTED SHARES AWARD AGREEMENT THIS AGREEMENT is entered into between The Charles Schwab Corporation, a Delaware corporation (the "Company") and ____ (the "Employee"). WITNESSETH: WHEREAS, the Company has adopted The Charles Schwab Corporation 1987 Stock Option Plan (the "Plan"), which provides for the granting of restricted shares of Common Stock of the Company ("Restricted Shares") to key employees of the Company and its Subsidiaries; and WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Committee"), which is responsible for the administration of the Plan, has authorized the granting of an award of Restricted Shares to the Employee, effective as of _____________________; and WHEREAS, this Agreement is prepared in conjunction with and pursuant to the terms of the Plan and, although all of the terms of the Plan and the definitions used in this Plan have not been set forth herein, such terms and definitions are incorporated herein and made a part hereof by reference, and, except as otherwise expressly stated herein, the provisions of the Plan shall govern any interpretation of this Agreement; and WHEREAS, the Employee has accepted the grant of Restricted Shares and agreed to the terms and conditions hereinafter stated; NOW, THEREFORE, the Optionee and the Company agree to the provisions set forth in this Agreement. The Optionee signifies agreement with all of the terms and conditions of this Agreement by failing to provide written objection to the Company to any of the terms hereunder within 30 days of receipt of this Agreement, and in any event by exercising an Option granted hereunder. 1. Grant of Restricted Shares. The Company hereby grants to the Employee, as a separate incentive in connection with his or her employment and not in lieu of any salary or other cash compensation for his or her services, an award of ____ Restricted Shares, effective_____________, subject to all the terms and conditions in this Agreement and the Plan. 2. Restriction on Transfer. The Restricted Shares awarded pursuant to this Agreement shall be issued in the name of The Employee and held by the Secretary of the Company as escrow agent (the "Escrow Agent"), and shall not be sold, transferred, otherwise disposed of, pledged or otherwise hypothecated until the date such Restricted Shares become vested pursuant to paragraph 3 hereof (the "Restriction on Transfer"). The Company may instruct the transfer agent for its Common Stock to place a legend on the certificates representing the Restricted Shares or otherwise note its records as to the restrictions on transfer set forth in this Agreement and the Plan. The certificate or certificates representing such shares shall be delivered by the Escrow Agent to The Employee only after the shares become vested on the date specified in paragraph 3 and after all other terms and conditions in this Agreement have been satisfied. 3. Vesting of Shares. The Restricted Shares awarded by this Agreement shall become vested as follows: Effective as of the date hereof (the "Grant Date"), the Restricted Shares shall be 0% vested. If the Employee is employed for a continuous period beginning on the date hereof and ending on the third anniversary of the Grant Date, 50% of the Restricted Shares shall become vested. If the Employee shall continue to be employed for a continuous period ending on the fourth anniversary of the Grant Date, an additional 50% of the Restricted Shares shall become vested, so that at such time all of the Restricted Shares subject to this Agreement shall be then vested. Notwithstanding the foregoing, in the event of the Employee's Retirement after the second anniversary of the Grant Date, 100% of the Restricted Shares shall be then vested. For purposes of this Agreement, Retirement shall mean a termination of employment of the Employee at any time after the Employee (i) has attained fifty (50) years of age, and (ii) has completed seven (7) years of service, as determined pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. Notwithstanding the foregoing, however, the accrual of vesting pursuant to this paragraph is contingent upon the Employee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Employee, suspend or delay the vesting of the Restricted Shares hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Employee's performance is unsatisfactory. Upon the vesting of Restricted Shares hereunder, the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 4. Change in Control. Upon the determination of the Committee that a Change in Control of the Company has occurred, or in the event of the liquidation or dissolution of the Company, the Restricted Shares shall become fully vested and the Restriction on Transfer shall be lifted, notwithstanding any other provision of this Agreement, and the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 5. Discretion of Committee. The Committee may decide, in its absolute discretion, to lift at any time the Restriction on Transfer or to accelerate the vesting of the Restricted Shares, and the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 6. Delivery of Shares to Estate of Deceased Employee. Any distribution or delivery to be made to the Employee under this Agreement shall, if the Employee is then deceased, be made to the Employee's estate in accordance with the terms of Section 7.5 of the Plan. 7. Conditions to Issuance of Shares. The Restricted Shares deliverable to the Employee may be either previously authorized but unissued shares or issued shares which have been reacquired by the Company. The Company shall not be required to issue any certificate or certificates for Restricted Shares hereunder prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any State or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any State or federal governmental agency, which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The lapse of such reasonable period of time following the date of the grant of the Restricted Shares as the Committee may establish from time to time for reasons of administrative convenience. Neither the Employee nor any person claiming under or through the Employee shall be, or have any of the rights or privileges of, a stockholder of the Company in respect of any Restricted Shares deliverable hereunder unless and until certificates representing such shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Employee or the Escrow Agent. Except as provided in paragraph 8, after such issuance, recordation and delivery, the Employee shall have all rights of a stockholder of the Company with respect to voting such Restricted Shares and receipt of dividends and distributions on such Restricted Shares. 8. Certain Adjustments to Shares. In the event that as a result of a stock dividend, stock split, reclassification, recapitalization, combination of shares or the adjustment in capital stock of the Company or otherwise, or as a result of a merger, consolidation, spin-off or other reorganization, the Company's Common Stock shall be increased, reduced or otherwise changed, and by virtue of any such change the Employee shall in his or her capacity as owner of Restricted Shares which have been awarded to him or her (the "Prior Shares") be entitled to new or additional or different shares or securities (other than rights or warrants to purchase securities), such new or additional or different shares or securities shall thereupon be considered to be Restricted Shares and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan. If the Employee receives rights or warrants with respect to any Prior Shares, such rights or warrants may be held or exercised by the Employee, provided that until such exercise any such rights or warrants and after such exercise any shares or other securities acquired by the exercise of such rights or warrants shall be considered to be Restricted Shares and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan. The Committee in its absolute discretion at any time may lift the Restriction on Transfer of all or any portion of such new or additional shares of stock or securities, rights or warrants to purchase securities or shares or other securities acquired by the exercise of such rights or warrants. 9. Contribution of Par Value to Capital of the Company. Notwithstanding the provisions of Section 7.2 of the Plan, the Company will contribute to the capital of the Company on behalf of the Employee, as an Award recipient, an amount equal to the par value of the Restricted Shares issued to the Employee hereunder. 10. Tax Withholding. To the extent required by applicable federal, state, local or foreign law, the Employee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the awarding or vesting of the Restricted Shares hereunder, or by reason of any election made by the Employee pursuant to Section 83(b) of the Internal Revenue Code, and no Share certificates shall be issued to the Employee unless such obligation is satisfied. 11. Plan Shall Control. This Agreement is subject to all the terms and provisions of the Plan. In the event of a conflict between any provisions of this Agreement and any provisions of the Plan, the provisions of the Plan shall govern. Terms used in this Agreement that are not defined in this Agreement shall have the meaning set forth in the Plan. 12. Powers of the Committee. The Committee shall have the power to interpret and construe the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Employee, the Employee's estate, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. 13. No Effect on Other Benefit Plans. Nothing herein contained shall affect the Employee's right to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance or other Employee welfare plan or program of the Company or any Subsidiary. 14. Nonassignability. So long as the Restriction on Transfer is in effect, the Restricted Shares herein granted and the rights and privileges conferred hereby shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation or law or otherwise) and shall not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of such award or any right or privilege conferred hereby, contrary to the provisions hereof, or upon any attempted sale under any execution, attachment or similar process upon the rights and privileges conferred hereby, such award and the rights and privileges conferred hereby shall immediately become null and void. 15. Successors and Assigns. Subject to the limitation on the transferability of the Restricted Shares contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successor and assigns of the Employee and the Company. 16. Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 101 Montgomery Street, San Francisco, California 94104, or at such other address as the Company may hereafter designate in writing. Any notice to be given to the Employee shall be addressed to the Employee at the address set forth beneath the Employee's signature hereto, or at such other address as the Employee may hereafter designate in writing. Any such notice shall be deemed to have been duly given if and when enclosed in a properly sealed envelope, addressed as aforesaid, registered or certified and deposited, postage and registry fee prepaid, in a United States post office. 17. Severability. In the event that any provision of this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement. 18. Governing Law. This Agreement shall be construed in accordance with the laws of the State of California. EX-10 14 EXHIBIT 10.179 Exhibit 10.179 THE CHARLES SCHWAB CORPORATION 1987 EXECUTIVE OFFICER STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT THIS AGREEMENT is entered into as of _________________ between THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and __________ (the "Optionee"). W I T N E S S E T H: WHEREAS, the Board has adopted and the stockholders of the Company have approved The Charles Schwab Corporation 1987 Executive Officer Stock Option Plan, as amended (the "Plan") in order to provide selected Key Employees with an opportunity to acquire Common Shares; and WHEREAS, the Committee has determined that the Optionee is a Key Employee and that it would be in the best interests of the Company and its stockholders to grant the stock option described in this Agreement (the "Option") to the Optionee as an inducement to enter into or remain in the service of the Company or its subsidiaries and as an incentive for extraordinary efforts during such service: NOW, THEREFORE, the Optionee and the Company agree to the provisions set forth in this Agreement. The Optionee signifies agreement with all of the terms and conditions of this Agreement by failing to provide written objection to the Company to any of the terms hereunder within 30 days of receipt of this Agreement, and in any event by exercising an Option granted hereunder. SECTION 1. GRANT OF OPTION. (a) Option. On the terms and conditions stated below, the Company hereby grants to the Optionee the option to purchase _____ Common Shares for the amount of $24.625 per Common Share (the "Exercise Price"), which is agreed to be 100% of the Fair Market Value thereof on the Date of Grant. The number of Common Shares subject to this Option and the Exercise Price shall be subject to adjustment under certain limited circumstances as provided in Article 10 of the Plan. (b) 1987 Executive Officer Stock Option Plan. This Option is granted pursuant to the Plan, the provisions of which are incorporated into this Agreement by reference, and a copy of which is available upon request at no charge to the Optionee from the Company. In the event of any inconsistency between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall prevail. (c) Tax Treatment. This Option is not intended to qualify as an incentive stock option described in Section 422(b) of the Code. (d) Expiration Date. Notwithstanding any other provision contained herein, this Option shall expire not later than the date immediately preceding the tenth anniversary of the Date of Grant. SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION. Except as otherwise provided in this Agreement or as permitted by the Plan, this Option, and any interest therein, shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. SECTION 3. RIGHT TO EXERCISE OPTION. (a) Vesting. This Option shall become exercisable by the Optionee with respect to the total number of Common Shares subject to this Option as set forth under Section 1(a) above (the "Total Award Common Shares"), subject to the continued employment of the Optionee by the Company or its subsidiaries on each date either set forth below, and subject to the provisions of Section 3(e) hereof, in annual increments of the Total Award Common Shares beginning on the first anniversary of the Date of Grant, such that (i) no portion of this Option will be exercisable prior to such first anniversary of the Date of Grant; (ii) upon and after such first anniversary of the Date of Grant, the Optionee may purchase up to twenty-five percent (25%) of the Total Award Common Shares, provided the optionee has been continually employed by the Company or its subsidiaries since the date of grant; (iii) upon and after the second, third and fourth anniversaries of the Date of Grant, respectively, the Optionee may purchase an additional twenty-five percent (25%) of the Total Award Common Shares, provided in each case that the Optionee has been continually employed by the Company or its subsidiaries since the Date of Grant. (b) Minimum Number of Shares. This Option shall be exercisable for at least 100 Common Shares (without regard to adjustments to the number of Common Shares subject to this Option pursuant to Article 10 of the Plan) or, if less, (i) the number of shares with respect to which this Option has become vested under Section 3(a) above, or (ii) all of the remaining Common Shares subject to this Option. (c) Full Vesting on Change in Control. Notwithstanding subparagraph (a) hereof, this Option shall become fully exercisable as to the Total Award Common Shares immediately preceding any Change in Control with respect to the Company. In the event that the Committee determines that a Change in Control is likely to occur, the Company shall so advise the Optionee, and the provisions of this subparagraph (c) shall take effect as of the date ten (10) days prior to the anticipated date of such Change in Control. (d) Accelerated Vesting on Retirement in Certain Cases. Notwithstanding subparagraph (a) hereof, if the Optionee terminates employment with the Company and its subsidiaries on account of Retirement, all options granted hereunder shall become fully exerciseable, but only if such retirement occurs at least two (2) years after the date of grant. (e) Vesting Contingent on Satisfactory Performance. Notwithstanding subparagraph (a) hereof, the continued accrual of vesting pursuant to subparagraph (a) is contingent upon the Optionee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Optionee suspend or delay the vesting of Options hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Optionee's performance is unsatisfactory. SECTION 4. EXERCISE OF OPTION. (a) Notice of Exercise. The Optionee or the Optionee's representative may exercise this Option by giving written notice to the Company (or its designee) pursuant to Section 9(d). The notice shall specify the election to exercise this Option, the date of exercise, the number of Common Shares for which it is being exercised and the form of payment. The notice shall be signed by the person or persons exercising this Option. In the event that this Option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof satisfactory to the Company of the representative's right to exercise this Option. The Purchase Price for Common Shares shall be paid in a form that conforms to Sections 6.1 through 6.3 of the Plan at the time such notice is given. (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued a certificate or certificates for the Common Shares so purchased, registered in the name of the person exercising this Option. The Company shall cause such certificate or certificates to be delivered to or upon the order of the person exercising this Option. SECTION 5. TERM. (a) Basic Term. This Option shall in any event expire on the date specified in Section 1(d). (b) Termination of Employment. Subject only to the provisions of Section 3(d), upon the Optionee's termination of employment with the Company and its subsidiaries for any reason, whether as a result of death, Permanent Disability or any other involuntary or voluntary event of termination of employment (including a termination of employment as may be provided for or determined under an employment contract, if any, entered into between the Company or its subsidiary and the Optionee) (each, a "Termination Event"), no unvested portion of the Total Award Common Shares thereafter shall vest or become exercisable. With respect to the vested or exercisable portion of the Total Award Common Shares as of the date of such a Termination Event, this Option shall expire on the earlier of (i) the expiration date specified in Section 1(d) or (ii) whichever of the following is applicable: (A) in the case of a Termination Event resulting from death or Permanent Disability, the date one year following such Termination Event; (B) in the case of a Termination Event resulting from Retirement, the date two years following such Termination Event; or (C) in all other cases, the date three (3) months following such Termination Event. (c) Divestment of Options. Notwithstanding anything to the contrary contained herein, this Option shall immediately become forfeited and expire in the event that the Company terminates the Optionee's employment on account of conduct inimical to the best interests of the Company, including, without limitation, conduct constituting a violation of law or Company policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether the Optionee's employment has been terminated on account of conduct inimical to the best interests of the Company shall be made by the Company in its sole discretion. SECTION 6. LEGALITY OF INITIAL ISSUANCE. No Common Shares shall be issued upon the exercise of this Option unless and until the Company has determined that: (a) A registration statement for the Common Shares is effective under the Securities Act or an exemption from the registration requirements thereof has been perfected; (b) Any applicable listing requirement of any stock exchange on which Common Shares are listed has been satisfied; and (c) Any other applicable provisions of state or federal law have been satisfied. SECTION 7. NO REGISTRATION RIGHTS. The Company may, but shall not be obligated to, register or qualify the Common Shares for resale or other disposition by the Optionee under the Securities Act or any other applicable law. SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES. (a) Restrictions. Regardless of whether the offering and sale of Common Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of such Common Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state or any other law. (b) Investment Intent at Exercise. If the Common Shares under the Plan are not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Common Shares being acquired upon exercising this Option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. (c) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 8 shall be conclusive and binding on the Optionee and all other persons. SECTION 9. MISCELLANEOUS PROVISIONS. (a) Withholding Taxes. To the extent required by applicable federal, state, local or foreign law, the Optionee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the exercise of an Option hereunder, and no Option may be exercised unless such obligation is satisfied. (b) Rights as a Stockholder. Neither the Optionee nor the Optionee's representative shall have any rights as a stockholder with respect to any Common Shares subject to this Option until certificates for such Common Shares have been issued in the name of the Optionee or the Optionee's representative. (c) No Employment Rights. Nothing in this Agreement shall be construed as giving the Optionee the right to be retained as an employee of the Company or its subsidiaries. The Company reserves the right to terminate the Optionee's employment at any time for any reason, subject only to the terms of any written employment contract entered into between the Company and the Optionee. (d) Notice. Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the appropriate postal service, by registered or certified mail with postage and fees prepaid and addressed to the party entitled to such notice at the address shown below such party's signature on this Agreement, or at such other address as such party may designate by ten (10) days advance written notice to the other party to this Agreement. Notwithstanding the foregoing, no notice of exercise, as required by Section 4(a), shall be effective until actual receipt thereof by the Company or its designee. (e) Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof; provided, however, that in the event of any inconsistency or conflict between any provision hereof and the terms of the Plan, the terms of the Plan shall control. (f) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. SECTION 10. DEFINITIONS. (a) Capitalized terms defined in the Plan shall have the same meaning when used in this Agreement. (b) "Change in Control" shall mean the occurrence of any of the following events after the effective date of the Plan as set out in Section 14.1 of the Plan: (1) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (2) A change in the composition of the Company's Board of Directors (the "Board"), as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; (3) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. (c) "Common Share" shall mean one share of the common stock of the Company. (d) "Date of Grant" shall mean the date of this Agreement, which is the date first written above. (e) "Fair Market Value" shall mean the market price of a Common Share, determined by the Committee as follows: (1) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (2) If the Common Share was traded over-the- counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (3) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (4) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. (f) "Permanent Disability" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than twelve (12) months or which can be expected to result in death. (g) "Purchase Price" shall mean the Exercise Price multiplied by the number of Common Shares with respect to which this Option is being exercised. (h) "Retirement" shall mean a termination of employment of the Optionee occurring at any time after the Optionee (i) has attained fifty (50) years of age, and (ii) completed seven (7) years of service, as determined pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. (i) "Securities Act" shall mean the Securities Act of 1933, as amended. EX-10 15 EXHIBIT 10.180 Exhibit 10.180 THE CHARLES SCHWAB CORPORATION 1987 EXECUTIVE OFFICER STOCK OPTION PLAN RESTRICTED SHARES AWARD AGREEMENT THIS AGREEMENT is entered into between The Charles Schwab Corporation, a Delaware corporation (the "Company") and ____ (the "Employee"). WITNESSETH: WHEREAS, the Company has adopted The Charles Schwab Corporation 1987 Executive Officer Stock Option Plan (the "Plan"), which provides for the granting of restricted shares of Common Stock of the Company ("Restricted Shares") to key employees of the Company and its Subsidiaries; and WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Committee"), which is responsible for the administration of the Plan, has authorized the granting of an award of Restricted Shares to the Employee, effective as of _____________________; and WHEREAS, this Agreement is prepared in conjunction with and pursuant to the terms of the Plan and, although all of the terms of the Plan and the definitions used in this Plan have not been set forth herein, such terms and definitions are incorporated herein and made a part hereof by reference, and, except as otherwise expressly stated herein, the provisions of the Plan shall govern any interpretation of this Agreement; and WHEREAS, the Employee has accepted the grant of Restricted Shares and agreed to the terms and conditions hereinafter stated; NOW, THEREFORE, the Employee and the Company agree to the provisions set forth in this Agreement. The Employee signifies agreement with all of the terms and conditions of this Agreement by failing to provide written objection to the Company to any of the terms hereunder within 30 days of receipt of this Agreement, and in any event by accepting any dividends paid with respect to the Restricted Shares granted hereunder. 1. Grant of Restricted Shares. The Company hereby grants to the Employee, as a separate incentive in connection with his or her employment and not in lieu of any salary or other cash compensation for his or her services, an award of xxxx Restricted Shares, effective_____________, subject to all the terms and conditions in this Agreement and the Plan. 2. Restriction on Transfer. The Restricted Shares awarded pursuant to this Agreement shall be issued in the name of the Employee and held by the Secretary of the Company as escrow agent (the "Escrow Agent"), and shall not be sold, transferred, otherwise disposed of, pledged or otherwise hypothecated until the date such Restricted Shares become vested pursuant to paragraph 3 hereof (the "Restriction on Transfer"). The Company may instruct the transfer agent for its Common Stock to place a legend on the certificates representing the Restricted Shares or otherwise note its records as to the restrictions on transfer set forth in this Agreement and the Plan. The certificate or certificates representing such shares shall be delivered by the Escrow Agent to the Employee only after the shares become vested on the date specified in paragraph 3 and after all other terms and conditions in this Agreement have been satisfied. 3. Vesting of Shares. The Restricted Shares awarded by this Agreement shall become vested as follows: Effective as of the date hereof (the "Grant Date"), the Restricted Shares shall be 0% vested. If the Employee is employed for a continuous period beginning on the date hereof and ending on the third anniversary of the Grant Date, 50% of the Restricted Shares shall become vested. If the Employee shall continue to be employed for a continuous period ending on the fourth anniversary of the Grant Date, an additional 50% of the Restricted Shares shall become vested, so that at such time all of the Restricted Shares subject to this Agreement shall be then vested. Notwithstanding the foregoing, in the event of the Employee's Retirement after the second anniversary of the Grant Date, 100% of the Restricted Shares shall be then vested. For purposes of this Agreement, Retirement shall mean a termination of employment of the Employee at any time after the Employee (i) has attained fifty (50) years of age, and (ii) has completed seven (7) years of service, as determined pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. Notwithstanding the foregoing, however, the accrual of vesting pursuant to this paragraph is contingent upon the Employee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Employee, suspend or delay the vesting of the Restricted Shares hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Employee's performance is unsatisfactory. Upon the vesting of Restricted Shares hereunder, the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 4. Change in Control. Upon the determination of the Committee that a Change in Control of the Company has occurred, or in the event of the liquidation or dissolution of the Company, the Restricted Shares shall become fully vested and the Restriction on Transfer shall be lifted, notwithstanding any other provision of this Agreement, and the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 5. Discretion of Committee. The Committee may decide, in its absolute discretion, to lift at any time the Restriction on Transfer or to accelerate the vesting of the Restricted Shares, and the certificate or certificates representing such Restricted Shares shall be delivered to the Employee. 6. Delivery of Shares to Estate of Deceased Employee. Any distribution or delivery to be made to the Employee under this Agreement shall, if the Employee is then deceased, be made to the Employee's estate in accordance with the terms of Section 7.5 of the Plan. 7. Conditions to Issuance of Shares. The Restricted Shares deliverable to the Employee may be either previously authorized but unissued shares or issued shares which have been reacquired by the Company. The Company shall not be required to issue any certificate or certificates for Restricted Shares hereunder prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any State or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any State or federal governmental agency, which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The lapse of such reasonable period of time following the date of the grant of the Restricted Shares as the Committee may establish from time to time for reasons of administrative convenience. Neither the Employee nor any person claiming under or through the Employee shall be, or have any of the rights or privileges of, a stockholder of the Company in respect of any Restricted Shares deliverable hereunder unless and until certificates representing such shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Employee or the Escrow Agent. Except as provided in paragraph 8, after such issuance, recordation and delivery, the Employee shall have all rights of a stockholder of the Company with respect to voting such Restricted Shares and receipt of dividends and distributions on such Restricted Shares. 8. Certain Adjustments to Shares. In the event that as a result of a stock dividend, stock split, reclassification, recapitalization, combination of shares or the adjustment in capital stock of the Company or otherwise, or as a result of a merger, consolidation, spin-off or other reorganization, the Company's Common Stock shall be increased, reduced or otherwise changed, and by virtue of any such change the Employee shall in his or her capacity as owner of Restricted Shares which have been awarded to him or her (the "Prior Shares") be entitled to new or additional or different shares or securities (other than rights or warrants to purchase securities), such new or additional or different shares or securities shall thereupon be considered to be Restricted Shares and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan. If the Employee receives rights or warrants with respect to any Prior Shares, such rights or warrants may be held or exercised by the Employee, provided that until such exercise any such rights or warrants and after such exercise any shares or other securities acquired by the exercise of such rights or warrants shall be considered to be Restricted Shares and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan. The Committee in its absolute discretion at any time may lift the Restriction on Transfer of all or any portion of such new or additional shares of stock or securities, rights or warrants to purchase securities or shares or other securities acquired by the exercise of such rights or warrants. 9. Contribution of Par Value to Capital of the Company. Notwithstanding the provisions of Section 7.2 of the Plan, the Company will contribute to the capital of the Company on behalf of the Employee, as an Award recipient, an amount equal to the par value of the Restricted Shares issued to the Employee hereunder. 10. Tax Withholding. To the extent required by applicable federal, state, local or foreign law, the Employee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the awarding or vesting of the Restricted Shares hereunder, or by reason of any election made by the Employee pursuant to Section 83(b) of the Internal Revenue Code, and no Share certificates shall be issued to the Employee unless such obligation is satisfied. 11. Plan Shall Control. This Agreement is subject to all the terms and provisions of the Plan. In the event of a conflict between any provisions of this Agreement and any provisions of the Plan, the provisions of the Plan shall govern. Terms used in this Agreement that are not defined in this Agreement shall have the meaning set forth in the Plan. 12. Powers of the Committee. The Committee shall have the power to interpret and construe the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Employee, the Employee's estate, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. 13. No Effect on Other Benefit Plans. Nothing herein contained shall affect the Employee's right to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance or other Employee welfare plan or program of the Company or any Subsidiary. 14. Nonassignability. So long as the Restriction on Transfer is in effect, the Restricted Shares herein granted and the rights and privileges conferred hereby shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of such award or any right or privilege conferred hereby, contrary to the provisions hereof, or upon any attempted sale under any execution, attachment or similar process upon the rights and privileges conferred hereby, such award and the rights and privileges conferred hereby shall immediately become null and void. 15. Successors and Assigns. Subject to the limitation on the transferability of the Restricted Shares contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successor and assigns of the Employee and the Company. 16. Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 101 Montgomery Street, San Francisco, California 94104, or at such other address as the Company may hereafter designate in writing. Any notice to be given to the Employee shall be addressed to the Employee at the address set forth beneath the Employee's signature hereto, or at such other address as the Employee may hereafter designate in writing. Any such notice shall be deemed to have been duly given if and when enclosed in a properly sealed envelope, addressed as aforesaid, registered or certified and deposited, postage and registry fee prepaid, in a United States post office. 17. Severability. In the event that any provision of this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement. 18. Governing Law. This Agreement shall be construed in accordance with the laws of the State of California. EX-11 16 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 THE CHARLES SCHWAB CORPORATION Computation of Earnings Per Share (In thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ----- ----- ----- ----
Net Income $ 63,962 $ 70,095 $ 130,697 $ 117,038 ============================================================================================================ Shares* Primary: Weighted-average number of common shares outstanding 175,619 173,865 175,400 173,584 Common stock equivalent shares related to option plans 5,472 5,385 5,559 5,485 - ------------------------------------------------------------------------------------------------------------ Weighted-average number of common and common equivalent shares outstanding 181,091 179,250 180,959 179,069 ============================================================================================================ Fully Diluted: Weighted-average number of common shares outstanding 175,619 173,865 175,400 173,584 Common stock equivalent shares related to option plans 5,722 5,414 5,684 5,605 - ------------------------------------------------------------------------------------------------------------ Weighted-average number of common and common equivalent shares outstanding 181,341 179,279 181,084 179,189 ============================================================================================================ Primary/Fully Diluted Earnings Per Share* $ .35 $ .39 $ .72 $ .65 ============================================================================================================
* Excludes the effects of the three-for-two common stock split declared July 16, 1997, payable September 15, 1997. EX-12 17 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 THE CHARLES SCHWAB CORPORATION Computation of Ratio of Earnings to Fixed Charges (Dollar amounts in thousands, unaudited) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ----- ----- ----- ----
Earnings before taxes on income $ 105,743 $ 118,699 $ 216,063 $ 198,369 - ------------------------------------------------------------------------------------------------------------- Fixed charges Interest expense - customer 116,019 86,815 224,809 173,206 Interest expense - other 17,107 14,337 31,447 26,955 Interest portion of rental expense 6,521 5,834 12,747 11,261 - ------------------------------------------------------------------------------------------------------------- Total fixed charges (A) 139,647 106,986 269,003 211,422 - ------------------------------------------------------------------------------------------------------------- Earnings before taxes on income and fixed charges (B) $ 245,390 $ 225,685 $ 485,066 $ 409,791 ============================================================================================================= Ratio of earnings to fixed charges (B) divided by (A)* 1.8 2.1 1.8 1.9 ============================================================================================================= Ratio of earnings to fixed charges as adjusted** 5.5 6.9 5.9 6.2 =============================================================================================================
* The ratio of earnings to fixed charges is calculated in a manner consistent with SEC requirements. For such purposes, "earnings" consist of earnings before taxes on income and fixed charges. "Fixed charges" consist of interest expense incurred on payables to customers, borrowings and one-third of rental expense, which is estimated to be representative of the interest factor. ** Because interest expense incurred in connection with payables to customers is completely offset by interest revenue on related investments and margin loans, the Company considers such interest to be an operating expense. Accordingly, the ratio of earnings to fixed charges excluding customer interest expense reflects the elimination of such interest expense as a fixed charge. EX-27 18 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the Condensed Consolidated Statement of Income and Condensed Consolidated Balance Sheet of the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997, and is qualified in its entirety by reference to such financial statements. 1000 6-mos DEC-31-1997 JUN-30-1997 2,643,076 6,207,301 5,125,028 0 189,979 332,664 14,678,298 209,317 12,821,797 0 0 0 289,180 0 0 1,785 990,979 14,678,298 132,733 415,464 536,315 0 196,522 256,256 444,957 216,063 130,697 0 0 130,697 .72 .72
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